Dollar Stores Triumph in Latest Earnings Period. Here's How This Success Impacts Investors in the Coming Year.
Over half of 2024 has been tough for budget stores such as Dollar General (DG 0.42%) and Dollar Tree (DLTR -0.27%), which also runs Family Dollar. Higher-income families can cushion expenses by shopping more frequently at places like Walmart (WMT -0.40%), but Dollar Tree and Dollar General's main customer base doesn't have that option. They're merely spending less.
This trend is evident. Dollar General's sales growth has barely moved since last year, while Family Dollar's has even decreased (Dollar Tree's has been inconsistent at best).
If you're looking for signs that inflation and slow wage progress is finally easing for these stores' primary customers, you might have found it. The last quarter's results serve as a beacon of hope. It might be a good time to think about buying into these struggling tickers, anticipating a rebound in 2025.
Tiny sprouts
Inflation affects everyone, but it hits lower-income households with tighter budgets harder. As Dollar General CEO Todd Vasos pointed out regarding the company's weak second-quarter results (accompanied by a 20% drop in income), "the slow sales trends are partly due to a core customer who feels financially strapped." This sentiment was echoed by Dollar Tree CFO Jeff Davis during the same period, regarding the company's same-quarter numbers, which were equally unimpressive due to the "increasing impact of macro pressures on the purchasing behavior of Dollar Tree's middle- and higher-income customers."
Unsurprisingly, these stocks have behaved accordingly.
The mood has shifted since then, though. Dollar General's sales increased by 1.3% during the quarter ending in early November, breaking a multi-quarter slump. Dollar Tree's sales grew even more, up 1.8% year over year. Even the struggling Family Dollar chain's sales improved, increasing by 1.9% after several quarters of no or negative growth.
It's not just Dollar Tree and Dollar General showing renewed strength within the cost-conscious retail sector, either. Five Below (FIVE 0.27%) reported a small same-store increase for its recent third quarter, rectifying the substantial same-store-sales losses suffered during the previous two quarters.
If it were only one of these stores showing this growth, it might mean little. But seeing multiple companies performing so much better is a hint not to be ignored.
Powerful economic winds are picking up speed
One good quarter doesn't necessarily mark the start of a new trend. But all major, long-lasting trends begin with that initial small step. And it could be argued that even lower-income households are developing more disposable income these days.
Consider Bain & Company's Dynata Consumer Health Indexes as an example. While November's data shows improving optimism among households earning over $100,000 per year, the comparable index for households earning less than $50,000 -- Dollar General and Dollar Tree's primary clientele -- was higher for the month, and had also increased for the three-month span ending in November. The U.S. Conference Board's data supports this trend.
These consumers are likely feeling the impact of the relatively robust jobs market and the positive effects of inflation that hasn't spiraled out of control -- along with the ongoing benefits of wage growth. November's average hourly wage in the U.S. was up 4% year over year, still outpacing annualized consumer inflation when many consumers feared it wouldn't.
The underlying wind is likely to persist, if not gather speed.
Although the U.S. economy certainly still faces challenges, even thoughts of a so-called "economic soft landing" now seem unnecessary. Goldman Sachs now predicts this country's GDP to grow a solid 2.5% in 2025, outpacing expectations while keeping pace with the global economy's projected economic growth for the coming year.
This growth won't impact all socioeconomic groups equally; the wealthy will likely benefit disproportionately.
But it will still be financially beneficial to the dollar store industry's less affluent customer base, restoring at least some of the purchasing power they've felt they've lost over the past year.
Now's the time to take a measured risk -- even if few others are doing so
A guaranteed win right away? Neither of these two stocks are guaranteed to be at their rock-bottom prices right now, just like there's no guarantee that last quarter's rebound in same-store sales will continue to increase without stumbling. Ignoring the fact that Dollar General missed last quarter's earnings expectations, while rival Ollie's Bargain Outlet reported a slight dip in same-store sales for the same period, there's risk involved, to be sure.
Successful investing requires taking calculated, predictive risks based on your broader expectations. If you're waiting for it to be glaringly obvious that a prospective investment is a winner, much of any potential gain will have passed by.
This is a good enough reason to consider making a small investment in Dollar General or Dollar Tree before the end of 2024. You might want to limit your investment by only owning one or the other, but not both.
In light of the improved sales performance of Dollar General and Dollar Tree, it could be an opportune time to consider buying into these struggling tickers, anticipating a potential rebound in 2025. The growth in sales for these budget stores might be a sign that lower-income households are regaining some disposable income due to a robust jobs market, controlled inflation, and wage growth.
