What do the Cuts at Family Dollar Store Say About the US Economy?

Family Dollar Stores Inc. (FDO) had disappointing earnings for the second quarter of 2014 as the discounted store’ ambitious expansion strategies failed to court more price-savvy consumers. On Thursday, the firm reported $2.7 billion in revenue, down 6 percent from the year-earlier period.  Shares plunged 3.22 percent, closing at a 52 week-low of $52.17 apiece.

With warehouses swelling with unsold inventories, the company has decided to go the opposite way – cutting costs at every turn. In the next three months, Family Dollar is closing 370 stores and cutting 1,000 jobs.

Family Dollar is not the only loser during the harsh winter season, which led to lower consumer spending. The broader picture here is that nearly all store chains with “Dollar” in their name experienced a slowdown.  And their struggles help explain this economic cycle —when the economy is weak, consumers tend to spend more on budget-saving products; when it picks up, buyers leave the cheap shopping places behind for better options.

During the 2008 recession, Family Dollar and similar discount companies were spending big on expansion, benefitting from the financial distress of much of the country. The firm had 6,830 stores at that time and quickly shot up to its current size of 8,200 stores. But keeping this momentum up is hard, especially in a post-crisis period with lower and lower comparable sales growth trends every year.

In another words, the stumbles of big dollar store chains could herald a middle-class comeback. Some encouraging numbers make this more evident – like the jobless rate reaching a seven-year low.

Meanwhile, a range of companies from Gap Inc. (GPS) to Chipotle Mexican Grill, Inc.’s (CMG) beat Wall Street estimates and reversed their earlier losing streak. Earnings in the fourth quarter surged over 30 percent for Chipotle, and Gap, which owns Banana Republic, saw same store sales increase 1 percent in the quarter ending January 2014 amid a broad retreat of fashion designers like Forever 21 and H&M.

This could all indicate that previous constraint, shown by consumers riding out the recession, is giving way as people enjoy more discretionary items like movie tickets, cars and quality clothes.

According to Bloomberg, the warming weather in March has also boosted consumer credit and lending, with more people spending on big items. Car sales are estimated to hit a $16.33 million annualized rate this year, its strongest level since 2007.

Some economists have argued otherwise, though, observing that the upward spending trend could be explained by widening income gaps rather than an improving economy.

Steven Fazzari from Washington University in St Louis finds that the top 20 percent earners contributed to 61 percent of total consumer spending in 2012, compared with just 53 percent in 1992. Consumers from the bottom of the earning ladder have seen less food stamps support, slower-rising wages, and less lower-paying jobs.

Their shrinking purchasing power has transferred into Family Dollar’s slumping revenues in the past quarter, according to CEO Horward R. Levine. And the way to lure back consumer who earned even less, as Levine told a group of investors, is slashing prices on the company’s 1,000 basic products.