Investors are rightfully being drawn toward the deep-discount end of the retail industry. With rampant inflation and rising interest rates, companies that help consumers stretch their dollars further in this economy are poised to do well.
There are probably no better examples of this than the two biggest deep discounters, Dollar General (DG -0.08%) and Dollar Tree (DLTR 0.71%), both of which are handily beating the stock market indexes.
Yet while Dollar Tree has jumped 49% over the last year compared to a 8% gain by Dollar General over the past year (and versus a 13% decline by the S&P 500), Dollar General just might be the dollar-store stock that investors want to buy now.
Image source: Dollar General.
Setting itself apart
Dollar General has long been willing to sell goods above the $1 threshold, though most merchandise in its stores is $10 or less. Dollar Tree, which was long the industry pure play, selling everything for $1 or less, owns the Family Dollar chain that also sells a mix of goods at various price points. But Family Dollar still struggles to consistently contribute growth.
Yet Dollar General and Dollar Tree have excelled because both made heavy investments in consumable goods years ago, installing refrigerators and freezers in virtually all of their stores. Although the products carry lower profit margins than other merchandise, they build repeat business and help bolster average ticket values at checkout.
Dollar General, though, has distinguished itself by adding fresh produce to thousands of stores, with an eventual goal of offering it in more than 10,000 stores. It's also broadening its focus on healthcare through its DG Wellbeing initiative. This expands product offerings in stores; and in select locations, it is making available preventative care, urgent care, and chronic-condition management through a mobile provider called DocGo On-Demand.
Targeting the price-sensitive shopper
Where it's getting really interesting is in the very-deep discounter portion of its business that defines the space. Dollar Tree, of necessity, has wisely expanded the availability of higher-priced products to give its customers greater selection, whereas Dollar General is finding it advantageous to double down -- and triple down -- on the $1-or-less segment of its operations.
In the just-reported second quarter, CEO Todd Vasos said, "The $1 price point was one of, if not the fastest-growing subcategory we had here at Dollar General." As a result, Dollar General is "definitely leaning in, both in private brand and the $1 price point" to help shoppers feed their families, particularly toward the end of each month as money apparently gets tighter.
And private-label goods are helping the company boost sales further since pressured consumers are showing a willingness to trade down from name-brand products in exchange for the cheaper price that private-label goods offer. Dollar General is making strong penetration gains in consumables because of these goods, with sales growing quarter to quarter and year over year.
Steady as she grows
Dollar General raised its guidance for the year and now expects sales to rise 11% over 2021 on comparable-store sales growth in the range of 4% to 4.5%, and management forecasts earnings per share 12% to 14% higher than a year ago.
While Dollar Tree is expecting its earnings to pop 25% for the year with per-share profits forecast to be between $7.10 and $7.40, that's down sharply from its previous guidance of $7.80 to $8.20 per share, mostly due to problems at Family Dollar. Sales are expected to be up 6% from last year.
With the two-steps-forward, one-step-back dance with Family Dollar, Dollar Tree's full potential seems muted. Dollar General, though, has been a much more consistent deep-discount retailer. And with a forecast for steady growth and expansion as its value proposition draws price-sensitive consumers, I find its stock to be the better buy.
