Hungry for deals in a still-soft economy, bargainistas have
been out in full force recently scouring the nation's deep
Dollar Tree (
),Dollar General (
) and Five Below (
) kept their profits fat and comps healthy through the second
quarter, even as many apparel retailers and others foundered amid
pockets of weak consumer demand.
Variety discounters Dollar Tree and Dollar General racked up
double-digit earnings growth during the quarter. Teen-focused
value chain Five Below managed a triple-digit surge by offering
younger shoppers a wide array of cheap, trendy, fun items.
The message: The value proposition of deep discounters
continues to strike a chord with consumers.
"The environment has gotten better more recently for the
dollar stores," said MKM Partners analyst Patrick McKeever.
"You've seen consumers migrate more toward bigger-ticket
purchases like home furnishings and autos, which has had a
crowding-out effect on some of the mainstream retailers
Dollar stores don't feel that impact.
"The small-ticket purchases, the fill-in shopping trips and
convenience that dollar stores offer are in favor with
consumers," McKeever said.
The Trade-Down Dynamic
Dollar chains tend to outperform other retailers in a
challenging economy. The mid- to lower-income customers they
target are more economically sensitive, says Michael Niemira,
chief economist at the International Council of Shopping
The chains continue to see a "trade-down dynamic." BothFamily
Dollar Stores (
) and Dollar General say their fastest-growing customer segment
earns $60,000 to $70,000 a year, according to Wedbush analyst
Joan Storms, vs. their traditional customer base with average
annual incomes of $35,000 to $50,000. Dollar Tree customers
typically have higher incomes because its stores are in more
The proposition of brand-name basic goods at ultralow prices
is a big draw for consumers under pressure from the payroll tax
hike, ongoing high unemployment and limited wage gains.
"The weakness we've seen in the economy that started late last
year and sort of lingers currently is actually a helpful
environment for the dollar-store segment," Niemira said, noting
the group's same-store sales performance is, in some cases,
"really outpacing the whole industry."
He cites Dollar General's 5.1% pop in comps in the second
quarter as a standout.
The group, which includes Dollar Tree, Dollar General and
Family Dollar, saw second-quarter same-store sales rise 3.7% vs.
a year ago. The industry saw a 1.3% rise, according to an index
of 125 retailers compiled by Niemira.
Overall, the group has outrun the broader industry in
same-store sales growth since the second quarter of 2006, Niemira
says. It saw some slowing in comp growth in the back half of last
year and has since seen a re-acceleration in growth, says
Elbow Room For Five Below
McKeever says the chains are still expanding.
"It's one of the better growth areas of retail. There's still
lots of square footage growth," he said.
Five Below has even more fresh market to pursue. The
teen-focused value chain saw a 6.6% surge in same-store sales
growth in the second quarter. Earnings soared 175%. Sales climbed
35%, breaking a decelerating trend over the past several
quarters. Still, Five Below has booked double-digit sales gains
every quarter since its July 2012 IPO.
"This is a company very early in its growth cycle," said
Dougherty & Co. analyst Jeremy Hamblin.
The company opened 18 stores and ended Q2 with 276 stores in
19 states, up 22% vs. a year earlier. Hamblin says it could have
"in excess of" 2,000 stores over time.
And it continues to do well with new stores.
"The company wants the average new store to generate $1.6
million in first-year sales," Hamblin said. "However, new units
have actually been delivering closer to $1.8 million in
(first-year) sales -- even as the company has pushed into newer
geographies like Illinois and Michigan."
Secret Sauce Recipes
The chains use slightly different models.
Family Dollar stores feature national brands generally priced
between $1 to $10. Dollar Tree focuses on prices of $1 or
Dollar General is the largest discount variety chain, with
10,866 stores in 40 states as of Aug. 2. It offers merchandise
priced typically below $10.
Most dollar chains might not be racking up the gains Five
Below is seeing. But recent results from Dollar Tree and Dollar
General are encouraging, says Storms.
"They're clearly driving traffic with merchandising
initiatives such as expanded back-to-school assortments at Dollar
Tree and more consumables at Dollar General," she said.
Storms sees the outlook as positive, with potential upside
going into 2014 if economic conditions improve for lower- and
Dollar General saw its shares move to record highs after it
reported a better-than-expected 12% pop in second-quarter profit.
Sales increased 11%, also topping forecasts. It was its 16th
straight quarter of at least double-digit profit growth.
Its same-store sales gain of 5.1% was above estimates for a
4.2% rise. Much of that growth came from its newly introduced
tobacco products and strong sales of perishables, candy and
Analysts polled by Thomson Reuters see full-year earnings
rising 11%. They see a 17% gain in 2014, 2015 and 2016.
"I see strong growth ahead for Dollar General, given its
ongoing expansion of consumables like tobacco, beer, and wine as
well as implementing better management of the more discretionary
categories such as apparel and home," said Storms.
Dollar Tree's profit rose 10% in the second quarter, its
slowest earnings growth in years. But it was still a 16th
straight quarter of double-digit gains. Sales rose 9%.
The Street sees a 12% rise in profits for all of 2013, with a
pickup to 17% growth in 2014.
"Dollar Tree is our favorite stock in our discount retailer
universe," Storms wrote in a report, rating the stock outperform.
She cited its role as the only $1-price-point retailer, its more
economically resilient customer base and greater exposure to more
Five Below namesake stores sell a variety of fun,
trend-sensitive merchandise for the teen and preteen crowd. It
features all sorts of items the fickle teen crowd enjoys, such as
stickers to decorate a locker, magnets, inexpensive apparel such
as T-shirts, board games and low-priced basketballs -- all for $1
The "secret sauce" at Five Below is its merchandising team,
"They really do very well in finding interesting, new
merchandise," he said.
Five Below has been able to connect with teens by offering
value in a few ways. It "aggregates" its assortment under one
roof and pulls a lot of on-trend items together that appeal to
the teen and preteen crowd, says McKeever. That helps Five Below
stand out amid a crowd of youth-oriented retailers.
Cross-Fire Head Winds
The outlook for dollar stores is a mixed bag.
The prospects for 2014 remain positive, says Storms. Dollar
stores have become a staple retail concept, she says, with
competitive advantages such as convenience and a better shopping
experience than in the past, with nice store formats and
While Dollar Tree is her favorite, "we also like Dollar
General because they've executed extremely well," she said.
Piper Jaffray analyst Peter Keith's outlook is less rosy.
"The environment remains challenged through the end of the
year largely until we anniversary the payroll tax increase," he
said. "A lot of their core customers have less discretionary
Some of the head winds from the payroll tax hike will moderate
early in 2014, he adds.
"There's still tremendous growth opportunities across the
space," he said. "They serve a very good niche and they're a
convenience play for consumers."
Niemira forecasts real GDP growth of 2.1% in the 2013 second
half, a little stronger than the first half's 1.2% growth.
He sees 2.9% growth in the 2014 first half and 2.8% growth in
the year's second half.
"As we get into next year, I'm more optimistic some of the
head winds will disappear," he said. That could be both a plus
and a minus for dollar stores, as big retailers such asWal-Mart
(WMT) are also likely to start to rebound.
"In that kind of profile we expect the dollar stores' strength
may wane a bit," he adds, "as some of the other discounters pick
up the demand."