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Business News/ Companies / Dollar Stores Get Devalued as Low-Income Consumers Struggle

Dollar Stores Get Devalued as Low-Income Consumers Struggle

Two rival discount chains reported seeing similar problems in their customer base.

Dollar Tree stores are generally located in suburbs and cater more to higher-income consumers.
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Dollar stores’ core customers are feeling squeezed. That makes it a tricky time for these companies to prove that their turnaround efforts are bearing fruit.

Dollar stores’ core customers are feeling squeezed. That makes it a tricky time for these companies to prove that their turnaround efforts are bearing fruit.

Dollar Tree said on Wednesday that lower-income consumers are struggling with inflation and reduced benefits under the Supplemental Nutrition Assistance Program, once known as food stamps. It estimated that the decline in SNAP benefits pressured same-store sales at its Family Dollar chain by 5 percentage points in its quarter ended Feb. 3 compared with a year earlier.

Dollar Tree said on Wednesday that lower-income consumers are struggling with inflation and reduced benefits under the Supplemental Nutrition Assistance Program, once known as food stamps. It estimated that the decline in SNAP benefits pressured same-store sales at its Family Dollar chain by 5 percentage points in its quarter ended Feb. 3 compared with a year earlier.

Pandemic-era federal enhancements to food-stamp benefits ended for most states in March 2023. Dollar Tree rival Dollar General said on its earnings call Thursday that consumers are feeling the impact of the past two years of inflation: They are giving priority to necessities-driven categories over discretionary ones and opting for private-label products.

Dollar General on Thursday said same-store sales rose 0.7% in its quarter ended Feb. 2 compared with a year earlier, better than the 1.1% decline analysts polled by Visible Alpha had penciled in. Family Dollar, which is owned by Dollar Tree, saw same-store sales drop 1.2% from a year earlier in its corresponding quarter, worse than the 0.5% decline analysts were expecting. The Dollar Tree chain, which is generally located in suburbs and caters more to higher-income consumers looking for party favors and seasonal decor, fared better: Comparable sales rose 6.3%, better than Wall Street expectations of 5.4% growth.

Both Dollar Tree and Dollar General are in turnaround mode at the moment under seasoned dollar-store executives. Dollar Tree has been undergoing extensive repairs since Chief Executive Rick Dreiling took the helm last year. These have included store revamps and price investments at the struggling Family Dollar chain.

On Wednesday, Dollar Tree said it would close 600 unprofitable Family Dollar stores this year, in addition to about 400 Family Dollar and Dollar Tree stores that will close at the end of their lease term. This seems to be a sensible move: While Dollar Tree estimates the closures will reduce its top line by about $730 million, it also estimates it will help boost companywide earnings by about 30 cents a share on an annualized basis. Most of its new store openings this fiscal year will be Dollar Trees, which have better returns and performance.

Dollar General, meanwhile, brought back its former CEO Todd Vasos in October to help improve the business, which was struggling from underinvestment in stores and poor in-stock levels. Under what Vasos calls a “back-to-basics" strategy, the company has been reducing SKU counts, improving on-time inventory deliveries and staffing its stores better—especially the checkout areas.

In the earnings call on Thursday, Vasos said the company would eliminate self-checkout in more than 300 of its highest-theft stores and convert the self-checkout stations in 9,000 stores in a way that will direct customers first to staffed registers.

Both companies’ stock prices dropped following their respective earnings calls, with Dollar General falling 5.1% on Thursday and Dollar Tree shedding 14% on Wednesday. In addition to lukewarm results at Family Dollar, investors may have been taken aback by Dollar Tree’s lack of confidence in its previously announced target of $10 in annual earnings per share by 2026. On the earnings call, Dreiling said that while the company is “continuing to march toward that goal," the economic environment has been tough and that the company is dealing with “high shrink numbers," referring to theft.

Low-income consumers’ challenged wallets could mask the effect of the companies’ improvements in the first half of the year. J.P. Morgan estimates that U.S. consumers face a $2 billion headwind in the first half of this year compared with the last one after accounting for on-year changes in tax refunds, Social Security benefits, SNAP benefits, gas spending and student-debt repayment. This should, however, improve in the second half of the year, in large part because the negative effects of resuming student-debt repayments—which began in October—will hit harder in the first part of the year. In the second half, changes in those wallet impacts should turn into a tailwind of $34 billion in total, per J.P. Morgan estimates.

After the recent drops, shares of both Dollar General and Dollar Tree look cheap as a multiple of forward-12-month sales. On that basis, Dollar Tree is 11% cheaper than its five-year average, while Dollar General sports a 33% discount. That makes now a reasonable entry point for investors in the market for a retail turnaround story.

Write to Jinjoo Lee at jinjoo.lee@wsj.com

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