June 6, 2018 / 6:42 PM / 8 months ago

U.S. dollar-store shares marked down but specialty discounters thrive

    By April Joyner
    NEW YORK, June 6 (Reuters) - The shares of so-called dollar
stores have suffered as U.S. shoppers have started spending more
at bargain retailers with focused concepts and big discount
    Once thought to be insulated from the retail industry's
challenges, the dollar stores, which got the name because they
try to price items for $1 or less, such as Dollar General Corp
      , Dollar Tree Inc          and Big Lots Inc         derive
much of their sales from household staples.
    But investors have been drawn to two growing mid-sized
chains, Ollie's Bargain Outlet Holdings Inc          and Five
Below Inc         , which have carved out distinct niches within
the discount space focusing on discretionary items, analysts
    Appealing to trend-watchers and bargain hunters has helped
Ollie's and Five Below stand out while other discounters face
intensifying competition from new entrants such as German chains
Aldi and Lidl, analysts and investors said. 
    Ollie's sells brand-name overstock items from air
conditioners to hair dye, and Five Below caters to teens.  
    "They're differentiated concepts," said Anthony Chukumba,
managing director at Loop Capital in Chicago of Ollie's and Five
Below. "That's one of the reasons they're outperforming."
    Also, investors said, the strong U.S. economy and the
federal tax overhaul have given discount shoppers customers more
disposable income. As a result, some have shifted their spending
to big-box retailers such as Walmart Inc         and Target Corp
     Dollar Tree stock has fallen 24.1 percent this year, while
shares of Big Lots have plunged 26.6 percent. Shares of Dollar
General have risen 1.5 percent but still lag the S&P Composite
1500 Multiline Retail index             , which includes
discount retailers and department stores and has advanced 9.0
percent in the same period.
    Ollie's, whose stores are located mainly on the U.S. East
Coast, sells closeout and overstock merchandise at deeply
discounted prices. The company's shares have climbed 41.0
percent this year. Ollie's shares were little changed on
Wednesday after late Tuesday's first-quarter results beat
analyst estimates, while the company raised its sales and profit
guidance for the 2018 fiscal year.
    Gary Bradshaw, a portfolio manager at Hodges Capital
Management in Dallas, was persuaded to buy Ollie's shares after
coming across the store on a visit to Pennsylvania last year. He
compared his trip to Ollie's to a treasure hunt.
    "That was the neatest store," he said. "I came back and
bought the stock, and ever since, it's gone up and up and up."
    Five Below Inc         , which has locations in 32 U.S.
states and caters to pre-teen and teenage consumers with items
below $5, has had its shares rise 22.6 percent year to date. The
chain has found success capitalizing on teen-centered trends
such as slime-making kits and mermaid-themed items, Chukumba
said. Five Below is scheduled to report its first-quarter
results after the market close on Wednesday.
    Last week, shares of all three big dollar discount stores
fell after the retailers' quarterly results missed analyst
expectations. Dollar Tree and Dollar General attributed their
lower-than-expected same-store sales to unusually cold spring
    To be sure, they haven't completely lost favor. Loop Capital
has a "buy" rating for Dollar Tree, and Hodges owns both Dollar
Tree and Dollar General shares. Even some investors who are less
bullish on the discount segment say the dip in share prices may
make them attractive buys.
    "With the pullback in the stocks, they're getting close to
fair value," said Arun Daniel, senior portfolio manager at JO
Hambro Capital Management in Boston.
    Dollar General and Dollar Tree each have some 15,000 stores
throughout most of the United States. Five Below and Ollie's
combined have only about 1,000 stores. In Ollie's earnings call
on Tuesday, chief executive Mark Butler said the company, which
currently has fewer than 300 stores, sees potential to expand to
more than 950 locations.
    "It's a classic growth story," Bradshaw said, in reference
to Ollie's. "Everybody loves to find a deal."

 (Reporting by April Joyner; Editing by Alden Bentley and
Cynthia Osterman)
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