For the better part of 2019, Dollar General (DG 3.07%) couldn't open stores fast enough. All told, it established 975 new locations last year, with a similar number in the cards for 2020. Its deeper dive into groceries (and perishables like fresh fruits and vegetable in particular) is a hit. Consumers further responded to the fact that Dollar General was the antithesis of Walmart (WMT 0.75%), offering incredible convenience and speed.
Dollar Tree (DLTR 2.31%), meanwhile, spent most of 2019 seemingly still figuring out how to make the most of its 2015 acquisition of Family Dollar.
As the dust from a hectic several months for the discount retail business starts to settle though, changes are evident. Dollar General still deserves respect, but this is the year investors could really start to see Dollar Tree shine. Its capacity to reach more of the lower-income market at a time when the threat of economic recession looms only bolsters the bullish case.
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Dollar General is a growth machine
Dollar General did it right. Through years of smart expansion, the company now says more than 75% of the nation's population lives within a five-minute drive of at least one of its stores. That's in contrast with fewer but bigger Walmart stores, which may offer more merchandise, but don't allow the short shopping trips that smaller stores allow. Dollar General boasts the average customer is in and out in less than 10 minutes.
Its customer complexion is changing for the better too. GlobalData Retail analyst Neil Saunders noticed "an increase in the proportion of middle and higher income consumers using Dollar General for everyday essentials, mainly on the basis that the stores are convenient" late last year.
It's all a key part of the reason Dollar General's stock is up by more than 30% for the past 12 months, and up more than 100% over the course of the past five years. For comparison, Dollar Tree shares are down for the past year, and only about 16% higher than they were five years ago.
In the world of retailing though, competitors don't sit idly for very long while rivals pass them by.
After a tough start, Dollar Tree finds its groove
The direction Dollar General was already moving in at the time was a big motivation behind Dollar Tree's 2015 acquisition of Family Dollar. But, it has not been the panacea management had hoped for.
After shuttering dozens of Family Dollar units through 2018, in early 2019 the company revealed sweeping plans to close nearly 400 stores. At the same time, roughly 200 Family Dollar locales were also slated to be reopened as Dollar Tree stores.
The decision was the end result of a surprisingly challenging union of two related but unique companies. As GlobalData's Saunders observed of a $2.7 billion impairment charge taken at the time that was linked to Family Dollar's waning brand value, "Such a deterioration undermines some of the economics on which the acquisition and integration of Family Dollar were based."
Much can happen in a year though, and in this case, much has happened. Namely, right-sizing appears to be working out well. Family Dollar's same-store year over year sales growth rolled in at 0.8% for the final quarter of fiscal 2019 (ending on Feb. 1), following a 2.3% improvement in same-store sales during the third quarter. Both still trail sales growth for the Dollar Tree brand. It's a glimmer of hope, however, that a turnaround is taking hold, helped by last year's renovations of remaining Family Dollar stores.
Data source: Thomson Reuters/Refinitiv. Chart by author.
Even more, Family Dollar business-boosting renovations were planned for this year -- more than 1,000 in all, originally expected to be completed during the latter half of 2020. The advent of COVID-19 has obviously disrupted those plans, but for all the right reasons. That is, this wing of Dollar Tree is too busy selling merchandise to stop for lots of remodels now. For the three-month stretch ending in early May, Family Dollar's same-store sales were up more than 15% year over year.
This growth pace will certainly cool once the coronavirus pandemic does. In the meantime though, the unexpected boon is generating cash that will help fund those renovations.
The end of the COVID-19 outbreak will also let Family Dollar's sister storefront Dollar Tree resume an encouraging experiment -- Dollar Tree Plus. These select locations sell items prices higher than the $1 fare its stores are typically known for. In fact, during the first quarter of this year, the company announced plans for Dollar Tree Plus! 2.0, which will expand the appeal of existing Dollar Tree stores without cannibalizing existing sales.
Location, location, location
Perhaps most encouraging for current and prospective Dollar Tree shareholders is the fact that it never really wavered from addressing its proven core customers at a time when the economy is damaged.
As part of his assessment done late last year, GlobalData Retail's Saunders noted more Dollar General store openings in more affluent areas, which in turn implies it's aiming at more middle income earners.
It remains to be seen if we're at the onset of a technical recession. But with the Department of Labor indicating there are still nearly 20 million people in the United States that are officially unemployed, at the very least a wide swath of those consumers are rethinking their spending habits -- and their shopping venues.
Dollar Trees and Family Dollars haven't geographically crept into unfamiliar demographics though, leaving them in the right places for the tougher economic environment they tapped into several years back.
Bottom line
All of these initiatives and nuances are tough to see, and even tougher to measure; the coronavirus pandemic has obscured everything. They're still on the table though, even if they've been slowed.
Whatever the case, while Dollar General remains a solid company, it's only positioned to deliver more of the same for shareholders. Family Dollar has something new for investors that may not be fully reflected in the stock's price just yet.
