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Can Dollar Stores Save Shopping Centers?

Jan 01, 2021 by Maurie Backman
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It's been a rough year for retailers. In the course of 2020, dozens of well-known names have filed for bankruptcy, and while some were struggling before the pandemic began, for others, it was coronavirus-related closures and restrictions that truly did them in. In fact, we could see a substantial uptick in store closures in the wake of the pandemic -- something real estate investors understandably fear.

Malls and shopping centers already risked losing tenants before the pandemic. But now, widespread vacancies could slash property values and leave investors with massive losses on their hands. Thankfully, there are some retailers that aren't struggling in a coronavirus world. Dollar stores are faring relatively well, and that should give investors some degree of hope.

Staging a comeback

Like many retailers, dollar stores took a hit earlier on in the year when store closures were mandated on a national level. But more recently, big players in the industry like Dollar Tree (NASDAQ: DLTR), Dollar General (NYSE: DG), and Five Below (NASDAQ: FIVE) have seen their financial picture improve. Here's a look at some of their recent results:

  • Foot traffic increased 8.6% year over year during the first week of November for Dollar General, and in the second week of the month, it rose 9.6%. Net sales also rose 17.3% year over year to $8.2 billion in 2020's third quarter.
  • Five Below, meanwhile, saw a 9.9% uptick in traffic in October. And its third-quarter net sales rose 26.3% year over year to $476.6 million.
  • Dollar Tree also fared well. In 2020's third quarter, consolidated net sales rose 7.5% year over year to $6.18 billion.

At a time when the U.S. economy is in shambles, dollar stores hold a lot of appeal. They're a cost-effective way for struggling households to stock up on goods, and they allow bargain hunters to live out their most frugal fantasies. Plus, given that so many families are hunkering down these days and practicing social distancing, dollar stores offer parents the opportunity to stock up on entertainment for their kids on the cheap.

Furthermore, some dollar stores offer a wide range of essential goods, from canned food to personal care products. These are items that even cash-strapped consumers can't skimp on, so many are willing to forgo brand names and instead snag the products they need at a discount.

All told, dollar stores serve a very specific need, both during times of widespread economic distress and otherwise. And it's these establishments that could truly help shopping centers avoid a vacancy crisis.

Indeed, these establishments continue to expand. In the 39-week period ended Oct. 30, Dollar General managed to open 780 new stores, all the while sinking money into remodeling over 1,400. Five Below, meanwhile, expanded during 2020's third quarter with 36 new locations. And Dollar Tree opened 143 new stores -- and that's on top of renovations to existing establishments.

The Millionacres bottom line

If this trend continues and dollar stores are able to continue to grow, they may manage to replace the higher-end retailers that are eventually forced to close their doors, sparing shopping center operators and investors a world of hurt.

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Maurie Backman has no position in any of the stocks mentioned. The Motley Fool recommends Five Below and recommends the following options: long January 2022 $115 calls on Five Below and short January 2022 $120 calls on Five Below. The Motley Fool has a disclosure policy.