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Discount Retailers Dollar General and Dollar Tree Would Benefit From Inflation

By Dan Moskowitz – Jan 6, 2014 at 12:00PM

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Inflation combined with declining median family incomes makes for a challenging economic environment, but there are still winners in retail including Wal-Mart Stores, Dollar Tree Stores, Dollar General, and The TJX Companies.

Though Wall Street has been doing well in recent years, Main Street hasn't been doing so well overall. One telling number is median household income. When we all partied in 1999 -- blindly ignoring sky-high valuations and a lack of profitability -- we were wealthier than ever. At that time, the median family income stood at $56,080. This was America's peak from a wealth perspective. In 2007, the median family income was $55,251. In 2012, the median family income was $51,017. Are you noticing a trend here?

With the exception of highly-skill workers and top executives, incomes are falling while food prices are increasing. The Federal Reserve is really fighting against deflation which is causing mild food price increases. If all monetary stimulus were to be removed today, we would possibly be in a deflationary environment. However, that's not the environment we live in, and due to massive amounts of liquidity being pumped into the system, we're seeing inflation (at least temporarily).

Consumer solutions to inflation                                                                       Nielsen recently conducted a survey of 29,000 Internet respondents across 58 countries. The survey asked how consumers would alter their spending, as in where they would shop, if faced with rising inflation.

According to the survey, 33% of the respondents would shop more often at discount and dollar stores. This positions the dollar stores well. Just keep in mind that the survey was based on respondents in 58 countries, and the big three dollar stores only operate in North America. Nevertheless, if inflation increased, then many American consumers would likely shop more often at Dollar General (DG 0.35%) and Dollar Tree (DLTR 0.79%). The former is a larger company with 11,000 stores vs. 4,700 stores for Dollar Tree. Therefore, Dollar General is going to see more foot traffic. On the other hand, Dollar Tree sells all of its items for $1. Therefore, if Dollar Tree expands and infringes on Dollar General's territory (most items for $10 or less), it's likely to steal market share from Dollar General.

According to the survey, 28% of respondents would shop more often at de-stocking/clearance stores if inflation increased. This would benefit TJX Companies (TJX 0.61%), which has been extremely hot already thanks to offering 25%-70% off department store prices. This trend is likely to continue. Excluding the high-end consumer, everyone else is looking for the best values possible, which positions TJX Companies well. However, TJX Companies only has exposure to North America and Europe.

Also according to the survey, 23% of respondents would shop more often at hypermarkets/mass merchandisers. This would benefit Wal-Mart (WMT 0.43%) more than any other company, and Wal-Mart operates in 27 countries. Also consider that 21% of respondents would shop more often at warehouse clubs, and Wal-Mart owns Sam's Club, which operates in the United States, Puerto Rico, Brazil, China, and Mexico.

On the negative side, 40% of respondents would shop less frequently at convenience stores, and 36% of respondents would shop less frequently at specialty retailers.

The Foolish takeaway
Though the study focuses on inflation and how global consumers would react to cost increases, consumers will always search for bargains regardless of inflation or deflation occurring. According to the study, if inflation increases, consumers will shop more frequently at dollar stores and discount stores than anywhere else, with de-stocking/clearance stores coming in a close second. However, while hypermarkets/mass merchandisers lag a little with regard to future shopping trends given this hypothetical scenario, Wal-Mart offers the broadest exposure. 

Dan Moskowitz has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Walmart Inc. Stock Quote
Walmart Inc.
$153.07 (0.43%) $0.65
Dollar Tree Inc Stock Quote
Dollar Tree Inc
$151.33 (0.79%) $1.19
Dollar General Stock Quote
Dollar General
$257.23 (0.35%) $0.90
The TJX Companies Stock Quote
The TJX Companies
$81.03 (0.61%) $0.49

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

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