Dollar Store Chains See Surge in Higher-Income Shoppers Amid Economic Uncertainty
As economic uncertainty surges and households look to save, dollar store chains have seen an influx of higher-income shoppers in recent months. According to Dollar Tree (DLTR) CEO Michael Creedon, "higher-income customers have been a meaningful growth driver for us." He specifically noted that the company saw an increase in customers with household incomes of more than $100,000.
Dollar General Sees Significant Increase in Trade-In Customers
Earlier this week, Dollar General (DG) told investors it "saw the highest percent of trade-in customers" in the last four years during the first quarter. Its CEO, Todd Vasos, said the company saw increased trade-in activity, or consumers who would typically shop at higher-cost competitors, from middle- and high-income consumers, who came to Dollar General instead.
Tariffs Contribute to Economic Anxiety
The rise in shoppers turning to dollar stores and other discount retailers comes as evolving trade policy has created heightened economic anxiety among both consumers and businesses. A new report from ADP out Wednesday showed US private payroll slowed significantly last month. "The weak numbers we’re seeing now does not point to a labor market that’s collapsing, but there is hiring hesitancy," ADP chief economist Nela Richardson told reporters on a call.
Consumer Confidence Wanes in Recent Months
Consumer confidence has also waned in recent months. It rose in May for the first time all year. PwC’s Ali Furman told Yahoo Finance that while consumers showed "some resilience" month over month, they made more "discerning purchases." Dollar General expects its momentum to continue, as Vasos told investors, "Depending on where the macro environment goes, it should be very conducive to further trade-in, possibly as we move forward."
Dollar Stores Tend to Outperform in Weak Consumer Economy
Both dollar store chains tend to outperform when a weaker consumer and overall economy persist. When inflation hit 40-year highs in 2022, Dollar General and Dollar Tree stocks surged. Dollar Tree shares reached a record in April of that year, while Dollar General shares topped out in November.
Dollar Store Giants Outperform Larger Rivals
Year to date, Dollar General and Dollar Tree shares have handily outperformed the S&P 500 (^GSPC) — rising 45% and 18%, respectively — as well as larger rivals like Walmart (WMT) and Target (TGT). Over the past year, however, both dollar store giants remained laggards, with shares down more than 20%.
Tariffs Pose Challenges for Dollar Tree
Tariff uncertainty may be getting more customers in the door, but the story isn’t all positive for Dollar Tree. Dollar Tree stock fell as much as 10% in trading on Wednesday as the company outlined a profit hit on rising costs as a result of tariffs. The company now expects its second quarter adjusted earnings to be down as much as 50% compared to a year ago, before reaccelerating in the third and fourth quarters.
Dollar Tree’s Exposure to Tariffs
Direct imports make up 41% to 43% of Dollar Tree’s total retail value purchases, and China supplies the majority of those imports. When an analyst on the company’s earnings asked how important China was to the company, Creedon said, "Global sourcing is critical." In the quarter, Dollar Tree’s inventory increased 10%, or $247 million, to $2.7 billion due to "higher mark-on and inventory receipts as we expanded our multi-price assortment," CFO Stewart Glendinning said.
Dollar General Sees Strong Customer Traffic
However, Dollar Tree does expect strong customer traffic, with same-store sales expected to rise "towards the higher end" of its 3%-5% full-year outlook. Dollar Tree also updated its adjusted diluted earnings outlook and now expects to end the fiscal year in the range of $5.15 to $5.65, compared to the previously projected range of $5.00 to $5.50.
Dollar General Raises Earnings Forecast
Dollar General also raised its earnings forecast on Tuesday. The company now sees full-year adjusted earnings coming in between $5.20 and $5.80 per share, up from a range of $5.10 to $5.80. After a 15% rally on Tuesday, Dollar General stock was down about 1.5% in sympathy with Dollar Tree’s slide on Wednesday.
Dollar General’s Exposure to Tariffs
Dollar General’s exposure to tariffs is much lower than its rival’s, as 80% of its sales are food items, most of which are nonperishable items made in the US, like canned soups, beans, and chips. Morningstar analyst Noah Rohr previously told Yahoo Finance that Dollar General directly imports less than 10% of what it sells, with less than 70% of that coming from China.
Conclusion
The surge in higher-income shoppers at dollar store chains is a testament to the changing economic landscape. As households look to save and consumers become more discerning, dollar stores are well-positioned to capitalize on this trend. However, tariffs pose challenges for Dollar Tree, and it remains to be seen how the company will navigate these headwinds. Nevertheless, both dollar store giants remain attractive investment options, with strong momentum expected to continue in the near term.