Should You Invest in Dollar Stores?

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A lot of retailers are struggling, seeing stagnating or declining sales and tightening margins. Furthermore, a lot of Americans are in poor financial shape, as many of them are increasingly taking lower paying jobs and seeing the prices of goods they need to purchase everyday rise.

Two groups of retailers, however, have been able to buck this trend — high-end retailers and low-end retailers. This is the case because the rich are getting richer and the poor are getting poorer. While a lot of investors like the allure of high-end retailers, I think that these are generally very difficult companies to invest in because of the specific knowledge that one needs in order to find winners. For instance, why is Michael Kors (NYSE:KORS) doing so well? As investors, we can point to rising revenues and margins, store openings, promotions, and so on, but it is difficult to know why Michael Kors is performing well and why; for instance, Coach (NYSE:COH) is not. Furthermore, I don’t know if Michael Kors will be able to continue its strong performance in the long run.

Low-end retailers are different. While it is a generally slower grower with lower profit margins and less Wall Street appeal, it is pretty obvious why somebody would shop at a low end retailer — he or she has to do so for financial reasons. Millionaires typically don’t go to Dollar General (NYSE:DG) looking to save $0.30 on a box of cereal, but people who work minimum wage jobs do. Furthermore, I think I can venture a guess as to why a consumer chooses Dollar General over Family Dollar (NYSE:FDO) — it’s closer/accessible.

Thus, there are two reasons why I think investors should consider low-end retailers over high-end retailers. The first is the simplicity in the logic I lay out above. It is much easier to comprehend why somebody shops at Dollar General than at Tiffany’s (NYSE:TIF). Second, as a result, I can focus my analysis on determining discounted cash flow and growth estimates.

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