Analyst: Dollar stores' grocery gains slowing

NEW YORK (AP) -- The benefit that dollar stores have reaped from expanding their grocery and home products aisles has slowed due to increasing competition for shoppers' food dollars, a Nomura analyst said Monday.

Stores like Family Dollar and Dollar General have added more grocery and household items over the past two years in an effort to steal business away from supermarkets and big-box stores like Target Corp. and Wal-Mart Stores Inc.

Food and household products should continue to be strong sellers for dollar stores, said analyst Aram Rubinson, but they're finding that the business can be a tricky one. Groceries have tough price competition, leading to razor-thin profit margins.

Both Dollar General and Family Dollar said in recent quarterly reports that strong food sales hurt profit, because groceries are less profitable for the chains than other items.

Rubinson said Wal-Mart is fighting back in the grocery sector with lower prices and has begun to grow market share again. In addition, Family Dollar has also begun growing its grocery aisle more quickly than its rivals, adding competitive pressure, Rubinson said.

There's still potentially more growth, however, since dollar stores only have about 4 percent of total market share for groceries and household goods, Rubinson said

He cut his price target on Family Dollar Stores Inc. to $63 from $70. Shares rose 12 cents to $57.33. Shares have ranged from a 52-week high of $74.73 reached in June to a low of $53.03 last January.

Dollar General shares fell 26 cents to $43.46, down from a 52-week high reached in July of $56.04.

He lowered his price target to $45 from $50 Dollar Tree Inc., another dollar store, which has been less aggressive on prices in the grocery aisle. He also cut his 2013 and 2014 earnings estimates for Dollar Tree. Shares fell 70 cents to $39.26. The stock hit a 12-month peak in June of about $56.82.