How dollar stores can act as anti-inflation roles for investors
Dollar stores can operate as inflation rises for investors as shoppers try to stretch their budgets. Ahead of their recent earnings reports, some traders were concerned that Dollar General and Dollar Tree would underperform, especially now that the stimulus payments issued during the pandemic have faded. . Those concerns grew after dismal reports from Target and Walmart cast doubt across the group about retailers’ ability to handle rising input costs. Instead, the quarterly earnings of Dollar General and Dollar Tree reassured investors that discount companies offer some advantage in times of high inflation. Not only do these retailers have the pricing power to pass higher costs on to consumers, but they can also attract new higher-income shoppers trying to stretch their dollars. and discount. “This is the most unusual, difficult landscape for retailers I’ve ever seen,” said Bradley Thomas, analyst at KeyBanc Capital Markets. “As we try to figure out how investors should best position their portfolios, one thing we try to keep coming back to is who provides value to consumers, who has the potential to Society development and who have defensive characteristics, all really stand out the dollar stores,” he continued. Focus on Value Shares of both Dollar General and Dollar Tree both rallied last week on the back of their quarterly earnings. Not only did the two retailers beat expectations for earnings, revenue and sales at the same store, they also provided outlooks for next year, impressing investors. On Thursday, Dollar General stock rose 13.7% and Dollar Tree stock gained 21.9%. For investors, dollar stores can be an attractive option, especially when Wall Street thinks the risk of a recession will come in the second half of the year. Part of the appeal is their defensive qualities. Unlike big-box retailers that have more discretionary goods taking up square footage of their stores, discount chains focus on groceries and other items shoppers need on a daily basis, helping them relatively free from family spending cuts. Their convenient location also helps drive sales. The popularity and small size of Dollar stores put them within reach of many shoppers, with Dollar General reporting that they are within 5 miles of three-quarters of all consumers. Dollar General has 18,000 stores. Dollar Tree and its Family Dollar business have more than 16,000 locations. That’s a key advantage for both Dollar General and Dollar Tree as rising oil prices keep consumers mindful of their gas tanks – and as both retailers consider expanding their stores even further. “Because the stores are so small, you can really pack a lot of stores into one area,” said Loop Capital Markets analyst Anthony Chukumba. “You don’t need a huge population to support a store, so you can put stores close together and let the stores work.” The focus on value makes it easier for dollar stores to attract more affluent shoppers. During the most recent earnings call for Dollar General, CEO Todd Vasos said it sees its core customers shopping more “intentionally” and has attracted and retained more premium consumers as a result. consequences of the pandemic. “So that tells you the trade-offs and buybacks are alive and well and are probably starting to increase as we move into Q2 and into the year-end as things continue to tighten,” Vasos said. tight,” Vasos said. Meanwhile, Dollar Tree finished raising prices to $1.25 in its stores in February, a decision that gives discounters more flexibility in the mix of their merchandise. It also comes in $3 and $5 price points that it will roll out in more stores. “The $1.25 price tag opens up a lot of leverage that they can pull to improve their sales by giving them a slightly higher return that they can reinvest in the store to improve. improve the shopping experience and hopefully increase traffic,” said Thomas of KeyBanc. Some Key Differences Dollar stores have traditionally been seen as a steady business in good times and bad. Dollar General consistently increased its revenue year-on-year, reaching $34.2 billion in January 2022, up from $23.5 billion reported in January 2018. During the same period, Dollar General’s annual revenue Tree grew to a reported $26.3 billion in January 2022, up from $22.2 billion in January 2018.” Citi analyst Paul Lejuez said:[S]It seems that no matter what kind of economic environment it is, value tends to work well. On a relative basis, during times of financial hardship or consumer weakness, I think relative performance is even more apparent. “Moreover, they are expected to have the opportunity for store growth that can be a headwind for long-term investment, according to KeyBanc’s Thomas. However, there are still some differences between Dollar General and Dollar Tree. Dollar General has posted historically consistent results, analysts are looking for a change at Dollar Tree, which has struggled in the past because of Family Dollar’s underperformance. Last month, Dollar Tree brought on new leadership, including John Flanigan and Larry Gatta, both formerly of Dollar General, as head of supply chain and sales, to help pivot the Family. Dollar. With Dollar Tree just a few months away from a move to $1.25, Parikh is also watching for more evidence, said Oppenheimer’s Parikh. They show that consumers will continue to shop at the store even though the basket of goods is more expensive. Follow Walmart Other concerns still lie ahead. Discount companies have the power to set prices in part because Walmart, the company that makes the industry buzz, is raising prices as the big box maker also has to deal with higher costs. However, signs of slowing sales at Walmart could prompt management to slash prices to lure shoppers back to its stores. In 2016, Dollar General was forced to slash prices by as much as 10% on staples like eggs and milk as Walmart began a price war to regain market share. “Walmart is playing well in the sandbox right now,” said Citi’s Lejuez. “You know, one of the things that I’m going to keep an eye on is does Walmart continue to do well? Or do they get a lot of promotions at some point to try to capture market share? That’s not going to be good for anyone. no one competes with Walmart.” Now, the big-box retailer is reporting strong in-store traffic.
