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Cramer: Are Dollar Stores Worth a Dime?

Should you play the dollar stores for a bounce? Or will they just keep going lower?

Once the darlings of Wall Street for the past several years, lately dollar stores just can't get much love. Over the past 3 months, Family Dollar is down about 15%, Dollar General has fallen about 11% and Dollar Tree has just fallen close to 5%.

Should you play the dollar stores for a bounce? Or will they just keep going lower? Cramer thinks it's the latter.


First of all, the Mad Money host was less than impressed by the recent earnings reports from all three of these companies. "The trajectory of the results in this space has been downright lousy," he explained.

Of course every company has a weak quarter now and then – for Cramer, however, his concern about these stocks runs much deeper.

"It's not just that the quarters were seriously sub-par," he emphasized. "I didn't like what the dollar store managements had to say about what went wrong and how they can do better."

Cramer thinks the rhetoric signals a change is underway – one that presents serious challenges for these stores.

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"The Dollar Stores are now getting seriously squeezed by the competition from companies such as Wal-Mart, which has been taking share aggressively of late, as well as the drugstores like CVS and Walgreen's," he said.

"Meanwhile, after so many years of doing well, all of the dollar stores are now up against very difficult comparisons," Cramer added.

In addition, there's the end of the payroll tax holiday," he said. "This is something that's been dragging down all retailers, but I think it's especially bad for the dollar stores because higher payroll taxes hit low and middle-income consumers very hard."

Also, Cramer thinks Washington might not be done making things difficult for the dollar stores.

"With the debt ceiling fiasco and the negotiations over the budget sequester, it's possible we could see real cuts to entitlement programs in the next few months," Cramer said. That likely translates into less money from government programs for the poor, the main constituent of dollar stores."

Take all these negative catalysts together and Cramer thinks the dollar stores are facing serious headwinds.

"Considering the tough competition, the tough comparisons, and the higher payroll taxes on consumers, I think it's very hard to make the case that the dollar stores can be owned here," he said. "And I see no catalyst that can drive these stocks higher which makes buying them a big no-no."

However, that's not to say that Cramer doesn't see a play – he does.

"If you want to own something in this space, I say go with Five Below, a retailer where everything is five bucks or less," he said.

"Unlike the dollar stores, Five Below is a niche player—it caters to pre-teens at price points they can afford. The stock has shot up recently, so I wouldn't pull the trigger here but on a pullback I'd start a position. Make no mistake, this is the one to own," said Cramer.


Call Cramer: 1-800-743-CNBC

Questions for Cramer? madmoney@cnbc.com

Questions, comments, suggestions for the "Mad Money" website? madcap@cnbc.com

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