Flying under the radar

Here's a quick quiz.

For the first quarter ended May 4, Retailer X rang up a 25 percent gain in sales.

The company's comps grew 14.5 percent — on top of a 10 percent bump in last year's first quarter. Operating income climbed by 34 percent. Net income soared a whopping 51 percent. Earnings per share came in $0.02 above expectations.

Any educated guesses? (Psst — If those guesses are leaning toward any retailer headquartered in Minnesota, Wisconsin, Arkansas or New Jersey, they're off the mark.)

The retailer in question is Fred's Inc., the 399-unit discount general merchandiser that bills itself "America's favorite hometown store." Operating in just 13 Southeastern states, Fred's is flying (its stock has split twice in the past 12 months) — and the fact that it's doing so says a great deal about where both the economy and pockets of opportunity stand today.

Retail watchers spend a lot of time tracking the frenzied channel blurring taking place at mid-market — the Wal-Mart customers who also shop JCPenney, the Penney customers who also shop Dillard's, the Dillard's customers who also shop Linens 'n Things.

What receives far less attention is the extent of channel-blurring in the lower-price tiers of retailing. Fred's may be a discount general merchandiser, but it identifies its chief competition as Family Dollar, Dollar General and (like every other retailer on the planet) Wal-Mart.

While " hometown chains" of its ilk — generally, retail formats that make a point of pursing small, largely rural markets —often are regarded as shops for poor folk, a recent survey of American shopping habits suggests that channel-hopping is just as likely on the lower end of the retail divide as in the middle.

Fifty-six percent of women age 18 to 70 surveyed by WSL Strategic Retail for its How America Shops report had shopped in a dollar store in the previous 90 days. Among them, 37 percent had household incomes over $70,000.

Clearly this is not just a Tobacco Road business. But it ain't Calvin Klein, either. At Fred's, the bargains are chenille bed spreads for $19.50, scatter rugs for $10.00 and shower curtains for $7.00. And yes, it has its own private label in domestics — Southern Expressions — which can be found on bedding, bath, window treatments and rugs.

It's also, apparently, a business that is growing. Softlines (which in Fred's case includes apparel) grew from 11.9 percent of the business in last year's first quarter to 13.3 percent this year. The company opened 20 new stores during the quarter and will add another 40 before the year is out.

While those store opening numbers pale beside the more than 400 stores that Family Dollar and Dollar General each will open this year, it's also worth noting that a 60-store opening roster is on par with most big-box retailer schedules and way ahead of most department store ambitions for real estate growth.

This may not be the cheeriest of news for suppliers chasing the ever-elusive moderate business. But for anybody seeking a reality check, it's sure worth bearing in mind.