Dollar Stores Keep Passing the Buck

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Budget chains are handling inflation better than large retail counterparts

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like walmart and target,

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Dollar stores are watching their consumers spend toward essentials. Dollar General said that while consumable sales increased 9.1%, sales declined in all other categories—seasonal, apparel and home. Dollar Tree-owned Family Dollar saw comparable-store sales of discretionary items decline 14.7%, while sales of consumables rose 1.2%.

Despite the shift to low-margin consumables, dollar stores have done a better job of managing the bottom line than retail giants Walmart and Target. Dollar General’s net income declined 18.5%, reporting better results than Wall Street. Dollar Tree’s net profit increased 43.2% due to new price points in the Dollar Tree series.

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Dollar General CEO Todd Vasos said on Thursday’s earnings call that the company’s core customers are “intentionally” buying more and the chain is starting to see some high-income customers shop at its stores. Even though employment numbers remain healthy, inflation is accelerating the pace at which high-income consumers are doing business, Mr. Vasos said.

While Dollar General and Dollar Tree both raised their sales outlook for the current fiscal year, two things are worth watching. First, there is still the potential for slow burn in which core customers feel the pinch and spend less while higher-income consumers don’t get enough pinch to trade in draws. This, in fact, seems to be an emerging topic this week, with expensive clothing brands and department stores outperforming those with more affordable price tags.

And second, Dollar General and Dollar Tree are much bigger chains today than they were back in 2008. Both have more than doubled their number of stores since that time (for Dollar Tree, the count does not include Family Dollar, which it acquired in 2015). R5 Capital equity analyst Scott Mushkin said in an email, Dollar General was “the new kid on the block at the time, with prices much lower than many grocery stores.”

The competitive dynamic is different today, Mr. Mushkin said, as grocery stores have reduced their prices in many markets where Dollar General competes. For example, discount supermarket Aldi’s U.S. grocery market share has increased from 1.2% to 1.7% over the past five years, according to Euromonitor data.

Dollar General and Dollar Tree shares were up 14% and 18%, respectively, on Thursday. Year over year, both companies have outperformed retail competitors, with both now trading at multiples of 12 months of expected sales above their 10-year averages.

These stocks are already pricing in all the ups and downs of an economic downturn.

Write Jinjoo Lee at [email protected]

Credit: www.Businesshala.com /

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