Dollar General and Dollar Tree improve outlook as consumers grapple with inflation

Dollar General and Dollar Tree stores

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Shares of Dollar General and Dollar Tree surged on Thursday as discounters beat Wall Street quarterly profit expectations, raised outlook for the year ahead and spoke of consumers flocking to lower prices amid inflation.

As of noon on Thursday, shares of Dollar General were up about 14% and Dollar Tree about 20%.

Both retailers said they see an opportunity for growth as Americans place more importance on value in their buying decisions, whether buying groceries or seasonal decor. .

“We’re already starting to see our major customers start buying more intentionally,” Dollar General CEO Todd Vasos said in a call with analysts. And we’re starting to see that the next tier of customers are also starting to buy a bit more from us.”

Dollar Tree Executive Chairman Rick Dreiling listed the many challenges facing consumers, from the highest levels of inflation since the early 1980s to record gasoline prices and the uncertainty of current events. like the war in Ukraine and the pandemic. He added that many consumers “live paycheck to paycheck.”

“During tough times, value retail can be part of the solution to help families optimize their budget to meet their ever-changing needs,” he said.

Dollar General and Dollar Tree beat expectations for fiscal first-quarter earnings, revenue and same-store sales.

Dollar Tree, which includes the Family Dollar banner, said it now expects net sales for the year to be between $27.76 billion and $28.14 billion, down from 27.22 billion to $27.85 billion.

Dollar General said it expects net sales growth of around 10% to 10.5% compared to its previous expectation of around 10%. It raised its forecast for same-store sales to growth of around 3% to 3.5% from its previous expectation of 2.5%.

Here are three key takeaways from the first quarter earnings reports of the two discounters:

A different mix of goods

Shoppers still come to stores, but buy different items. Food accounts for a larger share of baskets and drove sales at Dollar General and Dollar Tree in the first fiscal quarter.

A year ago, consumers had extra dollars thanks to stimulus checks and child tax credits. This meant some were rushing for impulse items or discretionary purchases. Those dollars disappeared and other budget items, like groceries and gas, became more expensive.

Vasos said Dollar General’s same-store sales fell in each of the seasonal, apparel and home goods categories in the fiscal first quarter, but more consumables were sold. Overall, same-store sales fell 0.1% from the same period a year ago, beating the 1.3% decline analysts had expected, according to FactSet.

At Dollar Tree, soft drinks, salty snacks and cookies are among the items that have grown in popularity, especially as the retailer has expanded its food and beverage assortment. The company is the parent company of Family Dollar, a banner that favors food more than the namesake banner.

“We believe this is a traffic driver and customers discovering items and appreciating the value we give them, over time we believe this will help drive traffic throughout the store, not just in these categories,” said Michael Witynski, CEO of Dollar Tree. told analysts.

The companies’ selling models echoed those of Walmart and Target, two companies that also saw a shift toward groceries and away from general merchandise in the fiscal first quarter.

seize the moment

Even before inflation hit its highest level in four decades, Dollar Tree and Dollar General planned to expand their store footprints, expand into new categories and develop strategies to appeal more of customers. Retailers doubled that on Thursday – saying the tough economic backdrop makes the timing and deals more attractive.

Dollar General, which has more than 18,000 stores, will open 1,100 new locations this year. It will expand its new store concept, PopShelf, and continue with the addition of more health-related merchandise. And it will go global, opening up to 10 stores in Mexico by the end of this year.

The company is also expanding with its stores. About 800 of the new locations will be its largest 8,500 square foot format, with additional aisles for health and beauty items and coolers holding produce or other groceries, Chief Financial Officer John Garratt said. to analysts on the call.

Dollar General is adding more end caps and displays that highlight its less expensive private label and $1 items, Vasos said. He said the company has “seen an acceleration in our private label business” in recent weeks.

Dollar Tree, which includes more than 15,500 stores, is opening 590 this year. It adds a wider range of products by increasing the price of $1 items to $1.25 and adding $3 and $5 merchandise. And he’s recruited new executives to turn around his Family Dollar banner.

Manage higher costs

Dollar Tree and Dollar General were not immune to higher costs in the first quarter, and some investors wondered if they could keep prices low without hurting earnings.

So far, retailers have managed to beat Wall Street earnings forecasts despite rising prices for fuel, freight and more. This is something that Walmart and Target haven’t done.

Vasos said Dollar General may swap for other items or reduce sizes if the price of certain products increases. He said the company closely manages inventory to avoid a high level of markdowns and excess items that don’t sell.

Dollar General has also implemented a few other cost-cutting and profit-generating measures. It added self-checkout to more than 8,000 stores by the end of the first quarter. It plans to turn around 200 stores into self-service checkouts alone this year. It more than doubles its private fleet of trucks from 2021, so they will make up around 40% of its outgoing transport fleet by the end of the year. And it carries more healthcare products, like cough and cold medicines, which have better margins than food.

At Dollar Tree, a price hike was a big boost to profitability. The retailer announced last year that it would raise the price of dollar items by a quarter. It’s also rolling out $3 and $5 items to more stores.

Witynski said a wider price range means new sales opportunities during key seasons, such as the holidays. He said Dollar General saw strong sales around Easter and Valentine’s Day and expects similar momentum in the second half of the year with back to school, Halloween and the holiday season.

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