This post was originally published on this site
With unemployment soaring and consumers tightening their budgets, analysts forecast elevated sales at dollar stores like Dollar General Corp., Dollar Tree Inc. and Family Dollar.
U.S. weekly jobless claims rose Thursday by more than 2.1 million, with about 48 million Americans filing for jobless benefits since mid-March, when the country began lockdowns to beat back the spread of coronavirus.
Even if that figure is down from 2.4 million the week prior, it’s the 10th consecutive week above the two million mark.
Read: Jobless claims rise over 2 million again but data offer a glimmer of hope
Analysts forecast that the dire unemployment situation will continue for the foreseeable future.
“Unfortunately, elevated unemployment is likely through at least the balance of the year, in our opinion,” said John Zolidis, president of Quo Vadis Capital.
Dollar General DG, -1.66% and Dollar Tree DLTR, +11.55% both reported earnings and sales that exceeded expectations. Dollar Tree’s portfolio also includes the Family Dollar chain.
With more consumers minding, or restricting, their spending, low dollar store prices are appealing. Moreover, as consumers flocked to big-box stores, the smaller square footage of these dollar stores is less stressful for customers looking for a way to avoid large crowds.
Dollar General has 16,000 stores that are located within five miles of more than 75% of the U.S. population, said Todd Vasos, chief executive of Dollar General on the Thursday earnings call. These stores have a “convenient small-box format providing for quick in and out access and limited crowds, both of which are conducive to social distancing,” as well as merchandise that covers everyday essentials, he said, according to a FactSet transcript.
GlobalData has found that many Dollar General locations are in rural or suburban areas where the distance to a competing retailer might be greater.
“This localness was a major advantage during the crisis when many households were reluctant to travel too far and some were nervous about visiting big box stores where it is very difficult to reduce dwell time,” wrote Neil Saunders, managing director of GlobalData Retail.
Moreover, dollar stores had items in stock that were sold out at places like Walmart Inc. WMT, +0.98% and Costco Wholesale Corp. COST, +1.16% amid shopper pantry-loading.
Dollar General, in particular, which Saunders says has been able to attract customers from across the income spectrum, may be able to gain market share through the pandemic.
“From our data, this crisis has balanced out the demographics even more and Dollar General has secured new shoppers from across the income spectrum,” Saunders said.
“Some of this was born of necessity – because other stores didn’t have stock or were inconvenient to get to – however, the introduction has now been made and there is no doubt that some of these new customers will stick even if only for irregular shopping trips. In our view, we see the pandemic as providing a long-term advantage for Dollar General.”
Though all these names fall under the broader “dollar store” umbrella, there are significant differences between them.
The namesake Dollar Tree chain experienced a 0.9% same-store sales decline during the quarter, while Family Dollar same-store sales rose 15.5%.
Dollar Tree attributed this performance to declines around Easter and in the party and candy categories.
Dollar General same-store sales soared 21.7%.
“Dollar Tree stores are much less reliant on food and groceries and much more skewed towards general merchandise, including seasonal assortments of gifts, décor and other fripperies,” wrote Saunders in a separate note.
“Not only did this make Dollar Tree far less of a destination during the pandemic, it also meant the chain suffered as consumers cut back on inessential spending over the Easter holidays, which is a usually a strong trading period for the company.”
Dollar General’s Vasos, on the other hand, talked up the 55,000 coolers that are expected to be added to stores by the end of the year.
For the discount category, the coming months look pretty good even if the struggle will continue for shoppers.
“These businesses do very well when times are tough,” said Quo Vadis’ Zolidis. “Accordingly, we would expect these companies to continue to see a traffic and (possibly) profit boost for the foreseeable future. We would be buyers of both Dollar Tree and Dollar General today.”
Dollar General stock slipped 2.2% in Thursday trading, but has rallied 17.3% for the year to date.
Dollar Tree shares soared 10.7% on Thursday, and have gained 3.1% for 2020 so far.
And the S&P 500 index SPX, -0.21% has declined 5.2% for the year so far.
