Bargain Retailer Gains Broaden, Solidify

(MoneyWatch)  Picture this: Two women shopping in the home furnishings section of a Target store, clearly a mother and daughter, clearly setting up the younger woman's first household. Well dressed and groomed, even if the jeans-clad daughter is more casual in style than her mother, they are a picture of middle-class consumerism straight out of Madison Avenue. Evaluating various domestic products, they already have several items tucked away in their shopping basket, pans, dinnerware, just about everything needed to fit out the kitchen of a first apartment or house. The younger woman reaches for kitchen towels, clearly intending to keep a neat home.

"No," the mother tells her daughter firmly. "We get those at the dollar store."

Retailers my want to familiarize themselves with that statement. As the recession drags on, sales results demonstrate that an increasing number of consumers are finding dollar stores and related bargain retailers as places where they can save a few bucks on snacks, household cleaning supplies and more.

In its fiscal third quarter, Family Dollar saw growth in home furnishings and improvement in apparel sales, in addition to a 13 percent increase in revenues from everyday consumable products, Wedbush Morgan analyst Joan Storms noted. Those advances helped fuel overall sales growth of 8.2% to $1.84 billion and a comparable stores sales advance of 6.2%, which beat analyst expectations.

Storms also noted that she had held management meetings with Big Lots, not a dollar store but in the same general category of bargain retailer, ones that offer a mix of off brands and big label clearance items at conspicuously low prices. Big Lots is on the upswing in those categories that consumers have been avoiding in the recession. Among the stronger recent performers at its stores have been toys, domestics, seasonal products and furniture. Given Big Lots relative strength in discretionary categories, Storms said in a research note "there is strong potential for the company to outperform guidance."

That second quarter guidance is for comps in the negative one to three percent range. Compared to dollar stores, Big Lots carries a wider variety of merchandise including big ticket items like, as noted, furniture. So, even if the chain isn't moving through the recession as neatly as dollar stores, it is holding its own with comps falling 0.5 percent in the first quarter but profits up from 42 cents per share in last year's period to 44 cents in this year's. Big Lots relative strength is evident in comparison with retailers that also are heavily stocked with discretionary items, such as Target, which suffered a 3.7 percent comparable store sales decline in the first quarter and saw profits slide from 74 cents per share to 69 cents.

Consumers are learning new lessons in the recession at Family Dollar, Big Lots, Dollar Tree, Dollar General and other bargain retailers that have thousands of convenient locations they can conveniently shop if they so choose. Family Dollar alone operates more than 6,600 stores in the United States, 60 percent more than Wal-Mart.

The anecdote above really happened, and the conversation took place several years ago at a Target while the company was on the upswing and long before the recession threatened. Given their experimenting in the recession, more consumers will better understand the value of shopping bargain retailers and not only for kitchen towels but packs of chocolate covered graham crackers, antimicrobial dish soap, and, just maybe, furniture as well. The big change in retail that comes out of the recession may not be where consumers shop but what variety of stores. Across America, the refrain may become much more common: "We buy that at the dollar store."