Dollar Tree, Inc. (DLTR), Family Dollar Stores, Inc. (FDO), Dollar General Corp. (DG) & A Niche That Can’t Be Breached

Can it last forever?

Dollar stores sell a commodity product, yet earn staggering ROICs. However, it is dangerous to assume that a company has a sustainable competitive advantage simply because of a history of outsized ROIC; investing while looking in the rear-view mirror is bound to eventually fail.

The high ROICs will undoubtedly attract additional competition. In fact, Wal-Mart, angry at the dollar stores for borrowing its poorest customers during the recession, is making a major push into the dollar store category itself. It is anyone’s guess as to whether Wal-Mart can match the success of Dollar Tree, Inc. (NASDAQ:DLTR), Family Dollar Stores, Inc. (NYSE:FDO), and Dollar General Corp. (NYSE:DG), but it is almost certain that Wal-Mart’s entry into the market will lower ROICs for some time.

As a result, investors should expect lower profitability from the traditional dollar stores over the next few years, but should not count them out in the long run; their small-market locations are likely safe from Wal-Mart, so expect the traditional dollar stores to continue earning outsized profits for years to come.

The article A Niche That Can’t Be Breached originally appeared on Fool.com.

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