Low Gas Prices Good and Bad for Dollar Stores

The oil industry may have just handed discount and dollar stores a huge Christmas gift. Gasoline prices in parts of Missouri are now below $2 according to Springfield News-Leader.

The newspaper reported that at least one gas station in Joplin was selling regular unleaded for $1.89 a gallon. It isn’t clear how far the prices will fall or if such low prices will fall to other areas. Many states and regions including California have very high gasoline taxes.

For example the gas tax in Missouri is only 35.7¢ cents a gallon while people in neighboring Illinois pay 57.5¢ a gallon. In the Chicago area the gas tax is nearly 99¢ a gallon. Yet even with those taxes there’s still a lot of room for gasoline taxes to go down. In Western Michigan where the gasoline tax is 57.43¢ a gallon, USA Today reported that prices had fallen to below $2 a gallon for regular unleaded.

Naturally that puts more money in consumers’ pockets, USA Today estimated that the average American now $14 to $17 in additional spending money when he or she leaves the gas station. Naturally, many value investors will be wondering if this will boost dollar store operators like Dollar General Corp (NYSE: DG), Family Dollar Stores (NYSE: FDO), Dollar Tree (NASDAQ: DLTR) and Big Lots Inc. (NYSE: BIG).

If you take a look at the revenues the answer is yes. Dollar General’s TTM revenues rose from $17.17 billion in April to $18.46 billion on October 31, 2014. Dollar Tree’s TTM revenue rose from $7.97 billion in April 2014 to $8.361 billion in October. Family Dollar’s TTM revenue rose from $10.29 billion in February 2014 to $10.49 billion in August. Big Lots TTM revenue went from$5.316 billion in April to $5.33 billion in October.
Each of these small box discounters has seen a slight boost but not a big one. It looks as if the low gas revenue boost is only being felt slightly. One has to wonder what it will look like in January when the Christmas sales are reported. The small boxers have seen a little boost but they still face some serious problems.

Look Who Really Profits from Lower Gas Prices

The first of which is aggressive competition from Costco Wholesale (NASDAQ: COST), Kroger (NYSE: KR) and Wal-Mart Stores Inc. (NYSE: WMT).  Costco’s TTM revenue grew from $109.6 billion in May 2014 to $114.49 billion in November. Walmart’s TTM Revenue grew from $477.79 billion in April 2014 to $483.18 billion in October. Kroger’s TTM revenue grew from $101.34 billion in April 2014 to $106.48 billion.

If you judge by the TTM revenue figures it looks as if these three retail powerhouses are monopolizing the retail recovery. They’re raking in the lion’s share of the additional sales and the cash and leaving the dollar store operators to eat the crumbs.

There are several reasons why these behemoths are able to do this. The first is that they’ve shown an impressive capacity to match and often undercut the dollar store operators’ low prices. The Colorado Kroger’s subsidiary, City Market regularly sells coffee for $6.99 a can, while Family Dollar’s normal price is around $9.00 a can. City Market also sells tomatoes at 69¢ a can the same price as Family Dollar.

This hurts Family Dollar because City Market like Costco and Walmart has a far bigger selection than it does. Another reason why low gas prices are not helping Family Dollar is that people with more money want to go where they can buy more. Obviously the places with the most to buy are the Big Three. More money means less incentive to go to the dollar store.
To add insult to injury, the Big Three can deploy another secret weapon they sell gasoline. Most people know that Kroger, Costco and Walmart gas stations are around the cheapest around. Kroger gives those who hold its loyalty card 3¢ off a gallon on a regular basis and up to 10¢ off with special promotions. Low gas prices give the Big Three another great loss leader with which to hit the dollar stores.

Small Box Meltdown

My prediction is that dollar stores are going to face a really rough time next year because of the low gas prices. They’re going to have boost inventory, lower prices and work to hard to compete for a smaller piece of a shrinking pie. Expect to see more store closings and cutbacks in the small box sector.

One small box retailer Alco Stores Inc. filed for Chapter 11 in October and announced plan to liquidate its entire operation of 198 stores in 23 states. Alco was unable to compete in today’s retail market. My prediction here is that Alco’s liquidation is only the beginning. Expect to see major pain, major retrenchment and shrinking chains in the small box sector next year.