Dollar General's Advance Faces Walmart Counterattack
Dollar General (DG) just had a great quarter, but gains may become harder to come by as Walmart (WMT) rumbles back into its traditional discount store role.
This was the quarter when Dollar General rolled out the Bobbie Brooks brand, once an exclusive label at Walmart. Its adoption of the brand symbolized what Dollar General was becoming. Beginning as a true dollar store, the retailer was evolving into something that increasingly resembled the discount store as it existed 40 years ago. Not exactly the same, but serving consumers whose limited incomes encouraged them to purchase inexpensive brands at local stores.
Bobbie Brooks was an addition that filled out Dollar General's apparel assortment. It was a brand recognized in many of the communities that it serves, and the company used its own employees as models to emphasize the idea that its local stores -- the retailer has thousands -- embrace familiar values, thrift included. Like so much that Dollar Generals had done over the past several years, the introductions gave every indication of being well thought through.
Results demonstrate that Dollar General management has lately kept the company headed in the right direction, with comparable store sales, those at locations open for at least a year, gaining five percent in the most recent quarter and earnings per share of 41 cents up significantly over last year and beating an average analyst estimate. All signs point to smooth sailing for Dollar General, particularly as still-cautious consumers have been spending more at low-cost retailers.
Walmart, however, is likely to roil the waters. The addition of brands such as Bobbie Brooks may have broadened Dollar General's appeal, but it also moves more of its merchandise out of dollar territory. One reason DG has been able to add higher price goods with little resistance is that its most natural obstacle, Walmart, was busy adding more upscale products in pursuit of Target customers.
Having gotten over cheap chic envy, Walmart is returning to its everyday low price roots. The retailer will keep some higher-end product segments where they have had success, such as in electronics. But in returning to form, Walmart will press opening prices on goods that consumers buy year-round, including apparel items that compete with Bobbie Brooks. In the jeans department, Walmart needs no price adjustment to compete more effectively with the likes of Dollar General as its Faded Glory jeans are sold at the same $12 price as Bobbie Brooks.
Not long before it started chasing Target, Walmart tried its hand at dollar store sales. It even developed a dollar store shop at one location. It certainly isn't lost on Walmart that dollar stores have been doing better lately than its discount store rival even as they've added merchandise -- food and housewares in addition to apparel -- that it also carries at the end of a very efficient distribution system. Walmart must believe it can grab some of the spending that is flowing to dollar stores. And, of all the dollar stores, the one that has set up shop deepest in what had been Walmart territory is Dollar General.
This successful retailer will have heavier competition on its hands going forward. That will be the real test of whether Dollar General has really crafted an image as the go-to discounter of choice, or is merely selling from leased space the original owner is ready to take back.
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