Over the course of the last decade, it seemed that the rising dollar store theme could do no wrong. That was then. Add in a mix of Covid changes to retail/consumer behavior, add in higher wages to its operating costs, and add on some serious inflation on top of its goods that were previously considered very affordable. Now the dollar stores are in a serious pickle. Is the rise of the dollar store theme now dead on arrival?

Dollar stores are not just selling products for $1.00 or less. They have all gone into the “reach-up” pricing to increase their sales and relevance to consumers. These stores are frequently the dominant retailer in many smaller communities in America that are too small to support larger grocery or retail chains. The higher operating costs and the down-range effects of inflation on its customers have these stores in a scenario where it is going to be very difficult to win.

Tactical Bulls wants to offer a review of where the dollar store theme fits in for investors and consumers in 2024. The problem is that “tactical” may not apply in this case at all now. It may even feel terminal when you consider the laws of recovery investing (see below).

WHERE WE ARE TODAY

Tactical Bulls recently featured Dollar General Corporation (NYSE: DG) as a company that should strongly benefit after the coming interest rates cutting cycle is factored into the economy. Well, their need for lower rates could not be more evident. Dollar Tree, Inc. (NASDAQ: DLTR) was not given the same review because it does not pay a dividend — but make no mistake, Dollar Tree wants those Federal Reserve rate cuts just as bad as Dollar General.

Dollar Tree, Inc. (NASDAQ: DLTR) was down sharply on September 4, (2024) as earnings missed expectations and as the company is now more conservative on its sales outlook. The retailer did specify that some of the blame for weak guidance is “the increasing effect of macro pressures on the purchasing behavior of Dollar Tree’s middle- and higher-income customers.”

Dollar General pointed out that “the softer sales trends are partially attributable to a core customer who feels financially constrained…” The company’s Back to Basics is supposed to help on delivering “sustainable growth and long-term shareholder value.”

It should be no surprise that both dollar store giants tried to paint the best picture they could about what they can each control and their strategic plans. Dollar Tree has gone as far as initiating a formal review of strategic alternatives for its Family Dollar business segment — including a possible sale, spin-off, or other disposition.

IS WALMART TO BLAME?

While the dollar stores were the thorn in the side of Walmart, Inc. (NYSE: WMT) for many years, the current landscape has been greatly favoring Walmart. The world’s largest retailer has more scale, is tied into larger populations, has a far greater product mix (than any retailer), and frankly offers a better experience than the dollar stores. Some of the dollar stores in less competitive markets can be outdated, and in need of cleaning and organization.

When Walmart reported earnings on August 15 (2024), the company talked about stronger margins and growth in sales and earnings growth. That’s not the case for the dollar stores at the present time. The big difference is that Walmart is thriving from eCommerce growth and it seems hard to imagine that the Dollar Stores will be able to match the efforts of Walmart. Ditto for pickup and delivery options.

Walmart did not skip entirely in its commentary that times are harder, but it talked up the value-convenience proposition continuing to resonate with customers and members — with (market) share gains “across income cohorts primarily driven by upper-income households.” The company also said that its higher full year guidance assumes “a generally stable consumer and continued pressure from its mix of products and formats globally.”

THE STOCK MOVEMENTS

To prove the point, Walmart’s stock is currently within 1% of its all-time high ($77.81). Here is how that stacks up versus dollar stores:

• Dollar Tree’s stock was last seen down over 18% at $66.65, versus a 52-week range of $64.04 to $151.22.
• Dollar General shares were last seen trading down 2% at $82.04, and it also hit a 52-week low of $79.36 in sympathy with Dollar Tree’s results. That is down from a 52-week high of $168.07.

If Dollar Tree and Dollar General have both lost more than half of their share prices from their respective 52-week highs, then the $18 billion market cap of Dollar General and the $14 billion market cap of Dollar Tree also implies that these two companies have lost a combined market value of more than $32 billion just over the last year.

Dollar General’s stock had risen tenfold from its 2010 IPO that brought it back to the stock market to the end of 2022. Dollar Tree has been public since the mid-1990s and from 2010 to the end of 2022 its shares also rose approximately tenfold. Walmart’s gain since 2010 of about 400% may seem far less than what Dollar Tree and Dollar General had been accustomed to before 2022 but its market capitalization is now over $600 billion. That’s about 20-times larger than all of the value of Dollar Tree’s operations and Dollar General’s operations combined.

WHERE TO GO?

Where things become more difficult is in overcoming the laws of investing in recovery after huge losses. If a stock loses half of its value, it then has to double from the new lower share price just to get back to where it was. Doubling a stock, particularly when their businesses are facing pressure, can often take years. And there are of course no assurances that companies can turn their operations back around in any quick manner (or even at all!).

Dollar stores may need to spend heavily, sooner rather than later, to boost the look and feel of their shopping experience. How they can win in pickup and delivery in an ecommerce world is currently elusive. And beefing up the staffing to help the experience may be too costly for these companies to consider.

There feels like very little, if any, “tactical” case here for investors. The performance numbers do not look “terminal” by any real metrics versus other troubled retailers in business history. That said, there have been too many giant retailers to count over the decades which have slid into oblivion and never been able to dig their way back out. Now each one of these players is going to have to take very aggressive steps to attract new investors and to keep their customers.