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Dollar Store Bidding Wars Heat Up

22 August 2014 in Trading Ideas

The takeover of low-cost retailer Family Dollar has just become a lot more interesting.

Earlier this week, Dollar General, the nation’s largest dollar-store chain, offered to pay $9 billion in cash for Family Dollar, the country’s second-biggest outlet. The move comes three weeks after rival Dollar Tree, the No. 3 chain in the US, signed its own agreement to buy Family Dollar.

The target company said it would review Dollar General’s bid of $78.50 a share but also said it continued to recommend that shareholders vote for Dollar Tree’s $74.50-a-share bid.

To no surprise, the bidding war has done wonders for Family Dollar’s stock, which is up more than 30% since the Dollar Tree deal was announced three weeks ago.

 

But the entire industry also seems to have benefited. The “Bargain Basement” segment of the Discount Nation motif is up 13.6% in the past month.

The entire motif has gained 5.1% in the past month. In that same time, the S&P 500 has risen 1%. So far this year, the motif is down 2%; the S&P 500 has returned 8.9%.

The Wall Street Journal reported that the move toward dollar-store consolidation comes amid a wave of retail consolidations as companies struggle with weak traffic and weak stores. A Dollar General/Dollar Tree link-up would be the largest yet this year for the retail industry, which has totaled the most deal activity by value since 2005.1

This trend, which the Journal said follows consolidation in the department-store sector a decade ago, is being driven, in some cases, by the exact same phenomenon: the rise of web-based rivals like Amazon, which has brought heightened price competition and lowered antitrust officials’ concerns about retail mergers – even when they involve leading names in specific niches.

In the case of dollar stores, the Journal said, the deals involve a business that has done well in the wake of the recession. The chains have managed to entice customers away from larger chains like Wal-Mart and Target, as low-income shoppers appear to have changed habits and begun making fill-in trips to buy cheaper goods at dollar stores.

Trips to dollar stores have risen since the financial crisis, with 53% of US shoppers in 2013 saying they went to one in the past month, up from 48% in 2007, according to data by consulting firm Kantar Retail, as cited by the Journal.2 Meanwhile, the percentage of shoppers visiting a Wal-Mart at least once a month fell to 65% in 2013 from 69% in 2007.

Dollar stores have appealed to cash-strapped shoppers with bargain-basement prices and locations that were closer to their homes than many Wal-Mart supercenters, the Journal said. The smaller package sizes of everyday items like laundry detergent and cereal fit into the budgets of consumers living paycheck to paycheck.

It isn’t necessarily a point of national pride that, as the US Bureau of Labor Statistics says, the number of working Americans living in poverty increased by nearly 40% during the last recession. However, it may signify a socio-economic direction that could benefit investors in dollar store stocks.

1Shelly Banjo and Michael Calia, “Bidding War Breaks Out to Dominate Dollar Stores,” wsj.com, Aug. 18, 2014.

2Paul Ziobro and Shelly Banjo, “Battle for Poor Shoppers Fuels Dollar-Store Deal,” wsj.com, July 28, 2014.

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