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

Revenue Figures Might Justify Expansion

It’s not just expansion that dollar store operators are spending money on. Family Dollar Stores, Inc. (NYSE:FDO)’s capital expenditures rose from $130.9 million in first quarter 2012 to $196.4 million in first quarter 2013.

The dollar store operator is burning through a lot of cash in its effort to be the big dog. Analyst Victor Selva estimates that Family Dollar’s capital expenditures for 2013 could be $650 million.

The only thing that can justify these expenditures is continued growth in revenue. Family Dollar Stores, Inc. (NYSE:FDO)’s revenues went from $6.98 billion in August 2008 to $10.4 billion on Feb. 28, 2013. Dollar General Corp. (NYSE:DG)’s revenue growth was even more impressive; its revenues went from $9.89 billion in July 2008 to $15.35 billion on April 30, 2013.

Will the Party End?

The expenditures could be sustainable if the revenues keep going up, but what if they don’t? Family Dollar reported sluggish sales at its last conference call and cut its earnings forecast.

This drop in sales can be attributed to cuts in food stamps and unemployment insurance programs. Selva estimated that between 10% and 15% of Family Dollar’s customers are on these programs.

Betting on Growth

Family Dollar Stores, Inc. (NYSE:FDO) and Dollar General Corp. (NYSE:DG) have both made an expensive bet on continued expansion. Like a lot of other retailers, they seem to think that revenues will magically expand as new locations open.

So far this bet has paid off, but it doesn’t look sustainable. The dollar store operators need to take a look at the numbers and rethink their expansion plans. If they don’t, there may be no

The article Are Dollar Stores a Bubble? originally appeared on Fool.com and is written by Daniel Jennings.

Daniel Jennings has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Daniel is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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