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Dollar stores: The miracle ends Add to ...

Dollar stores have lost their lustre in the stock market, ending an extraordinary winning streak that had driven the lowly retailers to heights of stock market stardom in recent years.

On Tuesday, Dollar General Corp. gave the group its latest setback, reporting slowing sales growth in the third quarter and delivery a disappointing forecast for the full year – even as quarterly earnings topped expectations among analysts.

The shares fell 7.9 per cent in afternoon trading, on a day when the broader market rallied nearly 1 per cent.

The trend is also worrisome: Since July, Dollar General shares have slumped 22 per cent, conforming to the popular definition of a bear market decline.

It’s not alone among discount retailers. Family Dollar Stores Inc. fell 8.3 per cent for its biggest one-day decline in nearly two years.

And Canada’s Dollarama Inc. has fallen 8.5 per cent from its record high just three weeks ago.

These steep reversals follow what had been a remarkable era for retailers that eschew top brands and big-ticket items.

From the start of 2010 to their highs this summer, these stocks rose an average of about 150 per cent each – or nearly seven-times the return on the S&P 500 over the same 18-month period – as consumers pinched pennies because of the slow economic recovery and stubbornly high levels of unemployment.

Rick Dreiling, chairman and chief executive of Dollar General, believes part of the recent shift is due to a sudden flare-up of consumer anxiety.

“I think the customer is fatigued, they’re tired, they’re scared,” he said on a conference call. “Every time you turn on the television, there’s a bunch of guys in suits who are frowning, telling you that the world’s going to go over the fiscal cliff.”

Indeed, Morgan Stanley argued last week that dollar stores were particularly vulnerable should Washington fail to agree on a budget, ending payroll tax cuts for low-income earners.

What’s more likely, though, is that dollar stores have become victims of their own success – attracting the attention of Wal-Mart Stores Inc., which has begun focusing on dollar-priced items, and growing to a size where sales growth no long dazzles.

In the case of Dollar General, sales at stores open for at least one year grew just 4 per cent in the third quarter, down from same store sales growth of 6.3 per cent last year and 5.1 per cent in the second quarter of 2012.

Brian Morrison, an analyst at TD Securities, recently lowered his recommendation on Dollarama to “hold” from “buy” – though with a bullish price target of $72 – in recognition of a similar trend.

“The financial outlook for Dollarama appears very positive,” he said in a note released at the end of November. “However, given the rapid growth the company has delivered, it is now at a point where we should see a deceleration of its earnings growth profile.”

Dollar stores have enjoyed an amazing run. Now, the glory years might be over.

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