I think it depends on if the market is saturated in a specific place. I've seen places that had several hobby shops and the market couldn't support them all. And they all folded around the same time, leaving a market with no LHSs and nobody willing to fill that void.
If there's a big enough market, more than one LHS can survive within it. For example, Portland Oregon has at least three decent hobby shops (though none are focused on O scale). One is a general hobby shop with a greater focus on RC planes and plastic kits but has two aisles of trains (mostly HO of course). The other two are train/centric and I can't recall any time I've been in there alone. Heck, I was just down there on Saturday and bought some stuff at one of them (as I have most of the times I've been there). Whistle Stop appears to be the most thriving of them, they have two to four employees at any given time and I see people buying stuff there all the time.
Beats me what their secret is other than stocking a little bit of everything (yes, they have a case and two aisles of O scale) and I wish someone could figure out their secret and bottle it for other places.
All that said, I have no idea what type of profit margin they really have. How many stores (hobby or otherwise) have we all seen that looked like they were thriving, and one day they close and you find out they were struggling all that time?
