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Stock Market Wrap-Up: Will Dollar Store Stocks Beat the Market?

By Dan Caplinger – May 28, 2020 at 5:20PM

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Stocks gave up their gains toward the end of the day.

The stock market gave up its winning streak, falling near the close after having spent much of the day in positive territory. Lingering doubts remain about whether the efforts to get the economy moving again will prove successful, and small-cap stocks in particular underperformed most of the major market averages. Losses for the Dow Jones Industrial Average (^DJI -1.71%), S&P 500 (^GSPC -1.51%), and Nasdaq Composite (^IXIC) were limited to around half a percent.

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Data source: Yahoo! Finance.

Fears of a recession have led some investors to take a closer look at dollar store retailers, which have historically done well during periods of economic weakness. The financial crisis in 2008 and 2009 and the ensuing recessionary period proved to be positive for dollar stores, and many wonder whether Dollar General (DG 0.16%) and Dollar Tree (DLTR -0.54%) can do as well this time around. With both stocks giving earnings reads today, it was a good time to look more closely at the dollar stores and their prospects.

Person next to forklift with Dollar General logo on the wall in a warehouse.

Image source: Dollar General.

Money grows on Dollar Trees

Shares of Dollar Tree jumped almost 12% on Thursday. The company's first-quarter financial results inspired shareholders to have new confidence in the dollar store retailer.

Overall, Dollar Tree's numbers were strong. Revenue was up more than 8% from the year-ago period, as same-store sales climbed 7% year over year. Earnings eased lower slightly from the first quarter of the previous year, but the bottom-line figures were still better than most investors had anticipated.

Even during a period when coronavirus fears hurt most retailers, Dollar Tree opened almost 100 new store locations and performed more than 200 renovations to the company's Family Dollar concept stores. That showed up in particularly strong results for Family Dollar locations, where same-store sales rose 15.5% compared to a 0.9% decline in comps at namesake Dollar Tree stores. The retailer attributed the difference to product mix, as Family Dollar has more cleaning products and household necessities in stock than Dollar Tree.

Generally strong results

Meanwhile, Dollar General also reported its results for the period. Although the stock gave up 2%, many of Dollar General's metrics were just as impressive as Dollar Tree's.

On the financial front, Dollar General reigned supreme. Revenue soared almost 28% year over year on a 21.7% rise in same-store sales during the first quarter, and earnings per share were up 73% from the year-ago period. Operating cash flow more than tripled to $1.7 billion, and Dollar General said that the home products category was the biggest contributor to rising comps.

The only shadow on the report was that Dollar General withdrew its guidance for the full year. Yet like Dollar Tree, Dollar General has seen some positive signs during the second quarter. It's also continuing to spend money on new stores and renovations of its own to keep up with its rivals in the retail industry.

With the likelihood that the coronavirus pandemic will have lingering economic impacts for the remainder of the year and beyond, dollar stores look like a smart bet for solid growth. As shoppers need to economize, you can expect to see sales figures at Dollar Tree and Dollar General remain strong. That makes them good candidates to beat the market -- especially if economic challenges persist.

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Dollar Tree, Inc. Stock Quote
Dollar Tree, Inc.
$136.10 (-0.54%) $0.74
Dollar General Corporation Stock Quote
Dollar General Corporation
$239.86 (0.16%) $0.39
Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
$28,725.51 (-1.71%) $-500.10
S&P 500 Index - Price Return (USD) Stock Quote
S&P 500 Index - Price Return (USD)
$3,585.62 (-1.51%) $-54.85
NASDAQ Composite Index (Price Return) Stock Quote
NASDAQ Composite Index (Price Return)
$10,737.51 (%)

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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