With consumers squeezed by high gas and food prices, dollar stores and discounters have an opportunity to win over customers across much of the income spectrum.
Sales were up in the second quarter at two of the biggest players in the space, Dollar General and Dollar Tree Inc. Here’s a look at how each performed in the period, and what they’re doing to adapt to the current market.
Sales: $9.4 billion | YoY: +9%
Operating profit: $913 million | YoY: +7.5%
Net new stores: +436
Highlights: Dollar General’s sales and earnings beat analyst estimates and were strong enough to prompt the deep discounter to raise its guidance for the year. CEO Todd Vasos, who is set to retire in November, said in a statement that its stores saw a “slight” increase in customer traffic as well as market share growth in consumables.
Higher inventory markups led to a modest increase in gross profit rate in the face of margin pressure from higher product, transportation and distribution costs, as well as increased markdowns elsewhere in the business and a higher share of lower-margin consumables.
Telsey Advisory Group analysts led by Joe Feldman said in an emailed note that Dollar General’s better-than-expected sales and profitability reflect “the impact of inflation and consumers continuing to increase reliance on Dollar General in a challenging economic environment.”
The analysts added that, despite higher costs and the end to last year’s stimulus payments, “we expect the business to improve as the year progresses, as consumers continue to increase reliance on Dollar General in this more challenging economic environment.”
GlobalData Managing Director Neil Saunders noted that Dollar General has “broken the curse” of negative comp sales from comparisons against the era of stockpiling in the early pandemic. “On a three-year basis, Dollar General has grown its top line by a third, which is an exceptional outcome that underlines it is one of the powerhouses of American retailing,” Saunders said in emailed comments.
Driving Dollar General’s sales growth, Saunders added, are consumers who are trading down to discounters amid inflation, as well as a “general easing up” of prices on some of the retailer’s items.
And, as it has for many years running, Dollar General is growing its store footprint, further adding to sales.
Dollar Tree Inc.
Sales: $6.8 billion | YoY: +6.7%
Dollar Tree comps: +7.5%
Family Dollar comps: +2%
Operating profit: $505.4 million | YoY: +25.7%
Net new stores: +70
New C-suite hire: The company tapped Jeffrey Davis for the chief financial officer role. Davis has held top finance roles at Qurate, Walmart, J.C. Penney and Darden Restaurants. He replaces Kevin Wampler, who is set to remain on as an adviser until next April.
Highlights: Coming off a board and executive shakeup, Dollar Tree said Thursday in its earnings release that it planned to invest in pricing — another way of saying cut prices — at its Family Dollar banner as a long-term path to “enhance our sales productivity and profitability, and ultimately our opportunity to accelerate store growth.” The company is also investing in merchandising and “store standards.”
The dollar store chain’s revenue for Q2 missed analyst estimates, and it lowered guidance on earnings because of its pricing moves.
During the recently ended quarter, Dollar Tree nudged its gross margins up 200 basis points in part on higher cost leverage with sales rising, which helped offset higher freight costs, markdowns, shrink and a higher share of low-margin consumables in its mix.
Saunders called Dollar Tree Inc. a “tale of two companies,” with Family Dollar underperforming at a time when consumers should be flocking to it. He attributed this to several factors.
“Foremost among these is a relatively weak proposition with a somewhat jumbled selection of products that, despite the dollar store environment, are not always sold at the most competitive prices,” Saunders said. “On top of this, the dingy and depressing environment in many stores is not conducive to attracting or retaining customers, nor is it helpful for increasing average basket size.”
For its part, the company is focusing its pricing strategy on Family Dollar, where it is looking to close price gaps with competitors.
For the company as a whole, CEO Mike Witynski said in a statement that the company remains “keenly focused on our associates, our DC network and supply chain, our value proposition and our technology.”