UBS Expert Call Shows Walmart isn't Biggest Threat to Dollar Stores, the Federal Government Is (DG) (FDO)

UBS hosted a discussion about the current state of the Dollar Store sector with Mary Winston, former CFO of Family Dollar Stores (NYSE: FDO) ('12-'15) and Michael Buxton, former SVP of Strategy & Merchandise Ops ('06-'12).

Overall, the industry has matured over the past ten years. Customer demand has shifted toward consumables, putting some pressure on the profitability of the model. The low hanging fruit to drive sales productivity since Dollar General (NYSE: DG) and Family Dollar have already added coolers, freezers, alcohol, & tobacco. There is an opportunity to move items off of trucks and onto the shelves faster, but this would require additional labor. FDO is probably 3-4 years behind DG in some of its merchandising, supply chain, & in stock initiatives.

Walmart (NYSE: WMT) is not as big a threat as people think. Dollar Store customers are busy, placing an emphasis on convenience, and locations are closer to them. This means the retailers can price 3%-5% higher than WMT when there is no competing store in close proximity.

Labor is a big focus. Both experts think that DG & FDO could benefit from adding labor hours for stocking products. With respect to WMT's recent wage hikes, the DS sector is a bit more insulated, as many of their stores are in smaller, rural communities that don't have as much direct employment competition. If the federal government boosts the minimum wage, it would impact the sector. Labor and rent account for two-thirds of the SG&A for these companies and their P&L's are sensitive to these inputs.

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