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Sector Snap: Dollar stores

NEW YORK (AP) -- RBC Capital Markets cut the ratings and price targets of two dollar store operators on Wednesday, saying rising payroll taxes and the need for more marketing will make 2013 a more difficult year.

Dollar stores did well during the recession as people sought more bargains and families tried to stretch their dollars. That hasn't changed, but the competition for those dollars is intensifying.

Not only must bargain stores battle one another, but supermarkets and big-box retailers like Target and Wal-Mart are making a grab at customer dollars for food and household product sales.

RBC analyst Scot Cicarelli said that dollar stores such as Family Dollar Stores Inc. and Dollar General Corp. are starting to experience a slowdown in sales and may try even more promotions to lure in customers.

Another issue facing dollar stores is the uptick in the Social Security payroll tax, which jumped back to 6.2 percent last week after President Barack Obama failed to win renewal of the temporary 2-percentage point payroll tax cut that's been in place for two years.

The higher payroll tax will probably hurt lower-to-middle income consumers the most, Cicarelli said, as they were already under significant financial pressure.

Other industry watchers have noted the increased competition, and some investors have sold off shares. Bigger companies saw shares begin to slide in the summer, and a more severe sell-off began in December.

Earlier this week, Nomura analyst Aram Rubinson reduced his price targets for Family Dollar Stores and Dollar General.

On Wednesday Cicarelli lowered the ratings of Family Dollar and Dollar General to "Sector Perform" from "Outperform." The analyst reduced Family Dollar's price target to $63 from $67 and trimmed Dollar General's price target to $49 from $54.

Shares of Family Dollar fell 87 cents to $56.45 in afternoon trading, while Dollar General's stock declined 47 cents to $42.89. Elsewhere in the sector, shares of Dollar Tree Inc. shed 68 cents to $38.33.