Remember when the threat of the rising dollar stores was a secular trend that just could not be stopped? Apparently, the age-old adage that “nothing lasts forever” is proving to be more than just a saying. The dollar store theme is caught between a rock and a hard place in America and how to escape remains elusive.

It wasn’t all that long ago that Dollar General Corp. (NYSE: DG) and Dollar Tree, Inc. (NASDAQ: DLTR) were taking sales from Walmart Inc. (NYSE: WMT). In the aftermath of widespread inflation and the erosion of consumer buying power over the last three years, now dollar stores are being hurt along with so many other chains and independent businesses.

All of this has happened when that elusive recession has never even come in full force. Just don’t dare forget about prices being up over 20% in the last three-year period. And don’t forget about a strapped consumer and a slightly less robust jobs market adding mental stress on lower-income consumers.

DOLLAR TREE

Dollar Tree, Inc. (NASDAQ: DLTR) just managed this week to break what would have been a 10-day consecutive losing streak for its stock. This was after closing at $120.98 as recently as June 3, 2024. Previously, Dollar Tree was looking at its lowest close since October of 2023 and the longest losing streak since mid-2022. That said, it’s one-day gain was followed with a 1.3% drop to $107.24 on Tuesday.

Dollar Tree was recently down about 10% so far in June and down about 25% year-to-date (YTD). That was also down almost 40% from its all-time high. Is inflation really hurting the company this bad?

DOLLAR GENERAL

Dollar General’s stock was facing a less painful move relative to Dollar Tree. Still, it was at $142.27 as recently as May 28 and as low as a $124.12 close on June 13. That was down about 13% in barely two weeks. It was also down 28% from its 52-week high of $173.47. And that’s down over 50% from its all-time high of nearly $260 in 2022.

Dollar General is supposed to be the best-in-class when it comes to investing in the rise of dollar stores. Its earnings per share (EPS) is projected to fall to $7.20 this fiscal year (from $7.55 EOS last year) and then expected to rebound to $8.17 next year. That’s just a blended valuation of about 16 times expected earnings over the next 18 to 24 months.

LARGER THEMES CHANGING

The big theme in the last decade was that dollar stores were able to grow their store count while also continuing to reach up to items much higher than the $1.00 price might indicate. It is not difficult to find items in the $10.00 range, and many dollar stores act as some of the only local grocery options in smaller communities. And somehow the persistent and pesky inflation, along with a cash-strapped lower-end consumer, are fermenting a scenario where lower-incomes shoppers just cannot afford to buy many of their necessities there.

So where are consumers going if they cannot afford to shop at dollar stores?

THE BLACK HOLE

Perhaps the biggest competitive issue against dollar stores is that Walmart Inc. (NYSE: WMT) has been acting like retail’s black hole. Walmart can suck up any consumer’s spending for anything and everything in just a single location and with a broader variety than any other brick-and-mortar retailer can match. That has thwarted the “reaching up” to the $10 and even higher category that dollar stores had been so successful in over the past decade. Walmart even recently hit a new all-time high of $67.57 after adjusting for February’s 3-for-1 stock split.

WILL VALUATIONS HELP?

Now begs a question for Dollar General’s stock value as the leader of the dollar store theme versus the black hole of Walmart. Dollar General is valued at about 16-times next year’s earnings expectations, only two-thirds of the 24.8-times next year’s earnings per share from Walmart. Does it matter that Dollar General’s dividend yield of 1.8% is now higher than Walmart’s dividend yield of under 1.3%?