Old Man Winter, the soft economy, and increased competition caused many retailers to struggle in the first quarter when they sold customers things that they wanted. However, Dollar General (NYSE:DG) and Dollar Tree (NASDAQ:DLTR) have found increasing fan bases by selling people things that they need. In part, this helped bring Dollar General to report its 25th quarter in a row of positive same-store sales gains through food and impulse-item sales.
The General's report
On June 3, Dollar General reported fiscal first-quarter results. Net sales popped 6.8% to $4.52 billion. Same-store sales lifted 1.5%. Diluted earnings per share flew 7.5% to $0.72. The company saw increases in both customer traffic and average transaction amount.
Sales of consumables "significantly outpaced" Dollar General's non-consumable categories. These especially included tobacco products, perishables, and candy and snacks. Rick Dreiling, CEO of Dollar General, said that the significant growth among consumables came despite "the challenges of unfavorable winter weather, heightened competition and the current economic environment."
The Tree's report
Meanwhile, Dollar Tree reported its fiscal first-quarter results on May 22 and did a bit better in terms of percentage growth. Sales, same-store sales, and diluted earnings per share climbed 7.2%, 2%, and 13.6%, respectively.
Bob Sasser, CEO of Dollar Tree, credited in part a "balanced mix of consumable products and exciting variety merchandise." Just like Dollar General, it seemed like "needs" and impulse products led the way.
During the Dollar Tree conference call, Sasser offered another very interesting observation about consumables, especially in regard to refrigerated and frozen foods. He's noticing that consumers have been coming in for the consumables and spending more on other products, often without planning this.
Sasser stated, "This increase in shopping frequency provides the opportunity to increase sales across all categories including our higher margin discretionary products."
The General and the Tree have this in common
Dollar Tree saw April as the best month during the quarter and that continued into May. Dreiling said something similar about Dollar General in the earnings release. He stated, "Sales trends began to improve in April and have continued to gain momentum." This suggests an improving overall environment for both companies and the strength in consumables is likely playing a strong role in this.
Dollar Tree's theory that consumable products are baiting in customers who then spend on other products seems to be playing out for Dollar General too. On the Dollar General conference call, Dreiling stated, "In quarter two we are seeing strength across both our consumables and the non-consumable categories."
Overall, Dollar General expects further improvements in its financial performance for the rest of the year. It guided for a sales leap of between 8%-9%. It expects same-store sales to increase by between 3%-4%. It forecast that earnings will come in at between $3.45-$3.55 per diluted share which is a decent amount above the $3.20 Dollar General earned last year.
Dollar Tree has explained that the reason for its continued success is a budget-conscious customer squeezing Dollar Tree's cheap price points into her budget. Dollar General, likewise, gave a more detailed explanation during the conference call. Dreiling stated, "What affordability means to our customer today is a trade-off between price and quality that best fits their budget. At times, she is showing a greater willingness to compromise on quality or functionality to get a lower price point to stretch her money."
That's a polite way of saying people are more willing than ever to buy low-quality items from the dollar and variety stores. Hey, I'm a fan of them too, and sometimes you can get really good deals on quality products, but like the items at a garage sale, many of them are just...undesirable. More importantly, discount low-quality goods are a sweet spot in retail today.
Both Dollar General and Dollar Tree seem to be operating in the right place at the right time. Although Dollar General does seem to be feeling a bit of a pinch from the economy, it seems to have been able to continue its stride by offering more perishable products which are keeping the momentum going.
Nickey Friedman has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. 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.