Family Dollar Stores, Inc. (FDO), Dollar General Corp. (DG): Are Dollar Stores a Bubble?

It seems like Family Dollar Stores, Inc. (NYSE:FDO) and Dollar General Corp. (NYSE:DG) are in a race to put a store on every street corner in America. This strategy of mindless expansion opens the door to vast numbers of potential customers, but it also shows some of the signs of a bubble.

Dollar General alone is planning to add 600 stores this year, which will give it 11,000 locations. That’ll make the dollar store operator the retailer with the most locations in America. Family Dollar currently operates 7,600 stores in 45 states and employs 50,000 people.

The Numbers Just Don’t Add Up

Can this kind of growth be sustained even in a nation that might be in economic recovery? The numbers say no; a SWOT analysis indicates that the U.S. discount market could support 15,000 additional dollar stores. The problem is when you add the number of stores Family Dollar Stores, Inc. (NYSE:FDO) operates and the number Dollar General Corp. (NYSE:DG) plans to open by the end of this year, the result is 18,600 dollar stores. Those numbers alone already exceed the number of new dollar stores the market might support.

You will find more statistics at Statista

There are currently 24,512 dollar stores in the U.S. and Statista.com claims that there are plans to open another 6,281 by 2016. The number of dime stores currently operated by the three biggest operators—Dollar General Corp. (NYSE:DG), Family Dollar Stores, Inc. (NYSE:FDO)and Dollar Tree (NASDAQ:DLTR) —is 19,500. If this rate of growth continues, we’ll hit that 15,000 number real soon; possibly as soon as 2017. It looks like the dollar store industry may soon reach the limits of growth.

Negative Cash Flow at Dollar General and Family Dollar

The cash flow numbers at both Family Dollar and Dollar General Corp. (NYSE:DG) call the expansion strategy into question. The latest figures indicate that both companies reported a negative cash flow.

Family Dollar Stores, Inc. (NYSE:FDO) reported a free cash flow of -$50.21 million on Feb. 28, 2013, while Dollar General did a little better posting a free cash flow of -$2.43 million. Neither company can generate extra cash with the locations they have now, yet they keep expanding mindlessly.

With such dismal cash flow, it’s also obvious how the dollar store operators are financing expansion: by borrowing a lot of money. How are they supposed to pay off those debts if they cannot generate a positive cash flow with their current locations?