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Gas Prices Putting a Crimp on Discount Retailers

Car owners aren't the only ones carefully watching high gas prices. Market analysts who cover discount retail stores are also keeping a sharp lookout on creeping costs at the pump. With crude oil approaching $53 on the Nymex, the sentiment on Wall Street is that higher gas prices are hurting discount retailers as lower-income customers get squeezed.

"The lower-income discount store consumer is facing higher gas prices in two key essential goods: food and gas," says Ralph Jean, an analyst at Wachovia Securities. "We believe the price increases are negatively affecting disposable income and spending, which is reducing sales in the discount retail sector on a dollar-for-dollar basis, year over year."

Wachovia says it defines the discount consumer as having an average income in the bottom 40 percent of all U.S. consumers, which was slightly above $15,000 in 2003.

Crude oil prices have jumped 75 percent from a year ago. The six-week average for gas prices stands at $1.96 per gallon. Wachovia Analysts estimate that every 5 cent increase in gasoline prices will impact same-store sales at large discount retailers such as Dollar General and Family Dollar by 20 basis points. Wachovia sets the breaking point where gas prices start to directly affect same-store sales at $1.66. Thus, Dollar General and Family Dollar have lost 1 percent in same-store sales this year due to rising gas prices, said Jean. When food is factored in, discounters' same-store sales have been cut by 2 percent overall. "We believe the rest of the discount sector may have been similarly affected," says Jean.

According to quarterly reports, however, discount stores are still performing strongly. For the second quarter of 2004, Dollar General reported net income of $71.3 million, a 19 percent increase over the same period last year. Discount retailer Dollar Tree reported second quarter sales growth this year of 12.5 percent to $704 million.

The only major discount retailer to report lower net income was Family Dollar, which reported an almost 10 percent drop in the company's fourth quarter, which ended in late August. The company said sales of discretionary merchandise had dropped.

However, Dollar General CEO David Purdue has recently told analysts that headwinds face the value retail sector. Possible negative factors include weak job growth, high winter fuel costs and rising gasoline prices.

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