Thanks for Visiting!

Register for free to get the full story.

Sign Up
Already have a account? Log In
Back to The Anchor

Dollar and Discount Stores: It’s The Offering, Not the Consumer

Thomas Paulson
Mar 22, 2024
Dollar and Discount Stores: It’s The Offering, Not the Consumer

One of the notable features from the results of Family Dollar and Dollar General was the steep decline in non-consumables sales. Family Dollar’s discretionary comps were down -12% and Dollar General's were down -5%. By contrast, all of the publicly reporting treasure hunt value retailers reported stable to improving results for their discretionary businesses. For example, Dollar Tree’s discretionary comps were up +3%.  Also recall that Walmart and Target noted an improvement in the sales trend for discretionary items in Q4 2023.

While ongoing economic pressures, delayed tax returns, and unwelcome weather may be affecting the discretionary spend at Family Dollar and Dollar General, the evidence suggests that it’s more that what they offer is not being purchased and the market share is going elsewhere. Given that discretionary products is where Family Dollar and Dollar General make their margin, that is a concern (and it may be one of the reasons behind Family Dollar store closings--i.e., locations where they struggle to win consideration for discretionary purchases). Recall that Family Dollar has a larger urban / inner-suburban footprint (as a percent of total) compared to Dollar General, resulting in more competitive pressure and substantially more market share loss. The sales declines also suggest that the two may have to invest some margin to enhance the value of the offering. And so, we’d watch this closely over the next year given the plethora of "everyday low price" (EDLP) dollar stores. (See our comments from Q3 results here.)

The other dynamic that is concerning is that the retail industry added a lot of shelf space in consumables since 2019. This was out of necessity (given the pandemic), but also a strategy to drive traffic and capture the benefit of food inflation on gross profit dollars. As such, there is an increasing risk of a burgeoning supply/demand imbalance between extra supply (i.e., consumable SKUs and shelf space) and an economically strapped consumer (or at least one with limited spending ability). For example, Dollar General now has fresh produce in more than 5,400 stores at the end of the year and is targeting up to 1,500 additional stores for produce in 2024. Also, recall that Dollar General and Family Dollar have been investing in price in consumables to capture share.

We also suspect that the improving visitation trend for Dollar General and Family Dollar during the second half of 2023 may reflect consumers coming in to cherry-pick hot promotions (but not much else) which results in a low-margin basket size. The decline in the basket size (units per transaction, or UPTs) and comparable-store ticket imply as much. Dollar General noted “accelerated share growth and penetration in private brand sales” which may reflect where they are amplifying their value messaging and lowering price points. The gross margin results of the two also suggest that cherry-picking may be a factor in the margin and profit declines. Dollar General’s gross margin is about even with 2019’s level, but operating margin is down 200 basis points. Family Dollar’s gross margin is down 130 basis points and operating results are a loss (not to mention, the company took a $2B impairment charge on the acquisition price paid and another $0.5B impairment for store assets). Lastly, gross margins at both are also down due to increased shrink (at a time that others are reporting stabilization or improvement), with management expecting a worsening for the 1H 2024 indicating an adverse mix is "shopper” related.

DG desktop-logo

Dollar General

Dollar General CEO Todd Vasos said, “ ...[T]he great thing about Dollar General is that with our size and scale, we're able to get a tremendous amount of CPG help when it relates to this higher level of activity. And so, our margins usually tend to be okay, as we move through these higher promotional markdowns...And by the way, this customer is getting healthier and healthier every day. We're seeing it. She's figuring out her expenses. I think you probably remember, I talked about this quite often. It takes her a few quarters to figure out when she gets a shock to the system. And unfortunately, this inflationary environment we've lived in for the last couple of years has been a shock and maybe even a double shock to her. But she's starting to figure it out. You can see it through the transaction data. You can see it on the unit side, and you can see it even on the mix side. She's starting to pick up a little bit more of that non-consumable-type items, that discretionary item a little bit more each and every passing week that we see. There's a lot of reason to believe that this markdown activity will actually help encourage her to get out and spend more at Dollar General at a time where she needs us most.” If the consumer is better, why where the discretionary results worse in Q4? 2024 is going to be an interesting year for the dollar channel. (As a reminder Dollar General is undergoing a rebuild program under returning Vasos called “Back to the Basics” which we wrote about here.)


Family Dollar/Dollar Tree

As it relates to Family Dollar, recall that the banner is undergoing a heavy transformation lift under CEO Rick Drielling (Dollar General prior CEO), which we wrote about here. On the transformation, Drieling said, “While the operating environment remains difficult, I don't believe the challenges we face are structural, and I continue to believe that a well-run and well-located Family Dollar store is a powerful retail force. As I mentioned earlier, we are taking aggressive actions to address underperforming stores...We believe our ongoing market share gains are a strong validation of the many initiatives we have underway. We are gaining traction in the vast majority of stores where they've been implemented, and I continue to believe that the Family Dollar banner is well-positioned for long-term improvement as we continue to focus on operational excellence and financial performance...I think our consumable the best it's been in Family Dollar, hearkens back to my old days as a grocer. In regards to pricing activity out there, the market continues to be relatively stable. I would even say, the promotional activity on the weekly flyers is relatively stable. It's not like we're seeing anything that's really wild. And I think our pricing position for Family Dollars is as good as it's ever been.”

Below, we discuss takeaways from the Treasure Hunt category:


Five Below

Like Dollar Tree, Five Below’s merchandise strategy is a mix of treasure hunt but with a sole focus on discretionary stuff and fun (or in the brand's language, lots of “Wow!”). Sales for Q4 2023 were in line with the year’s trend. December is the retailer’s power month at 51% of the quarter's visits and likely a larger amount of its sales. By contrast, January is only 20% of visits and likely a lower amount of sales. December traffic was up +19%, or around +8% on a comparable-store basis. For the quarter, comparable transactions were +3.9%, which led to a notable improvement in the two-year CAGR of +460 basis points.


Citi Trends

Citi Trends offers a "low-price off-price" merchandising model. On its most recent earnings conference call, Citi Trends CEO David Makuen said, “I am pleased to report that our fourth quarter and annual results were in line with our guidance. We delivered a solid holiday season as our ready set gift campaign resonated with existing and new customers. Our strong execution of the business across our strategic priorities fueled our performance throughout the quarter. Our customer base consisting mostly of families earning $45,000 per year and less continues to tightly manage discretionary spending in the face of lingering inflationary pressures. Despite this, customers young and old responded well to our edited and trend-right mix of head-to-toe outfits specially design pieces beginning with a strong Black Wednesday, followed by the peak day leading up to Christmas and last week, a nice finish for New Year's. Our ten-week holiday selling period comp was nearly flat to last year. Q4 closed with a softer January due to snow, ice and cold weather...During the quarter, particularly strong categories were home, toys, big men's apparel, outerwear, kids apparel and accessories, ladies footwear and beauty and accessory giftables.” As Placer traffic shows, the February traffic trend picked up nicely (below).



dd’s DISCOUNTS is one of Citi Trends primary competitors and part of Ross Stores Inc. Ross didn’t explicitly disclose dd’s comparable-store sales when it reported Q4 2023 results, but management seemed to indicate about +3%-4% growth. Combined with a square footage growth contribution of +4%, one would get to the +6% traffic per sq-ft that Placer shows. While management was less pleased about its new locations, they implied that the dd’s customer was on firmer ground and that they spent for the holidays.


Savers Value Village

Savers' Value Village (secondhand goods) banner took a traffic hit during October as consumers trialed Temu for their Halloween outfits, which we wrote about here. Traffic then went on to rebound for the holidays before being whacked by weather in January. Savers has a December-end quarter, for which it reported +3.1% comparable, and while softer sequentially, October is the biggest month of the quarter (37% in Census Retail Sales) and the 3% implies a much stronger finish to the period, something like +7%. During its Mar. 7 earnings call, CFO Jay Stasz said, “We feel very good about the underlying fundamentals of the business...there is some uncertainty in the overall environment, and consumers continue to manage their discretionary spending, so we think some level of cautiousness in our initial guidance is prudent. Our January sales were negatively impacted by severe winter weather in some of our key markets, but we've seen an acceleration in comp trends through February and early March and are encouraged by the trajectory of our business.” Placer confirms that rebound. To conclude, Saver’s merchandise offering is all discretionary (in the context of the dollar store’s discretionary business) and the results from Saver’s and management’s comments demonstrate no consumer pullback/softness.


Ollie's Bargain Outlet

Ollie’s Bargain Outlet (reseller of liquidated goods) reported excellent financial results on the back of strong traffic gains. While Ollie’s business model is different than EDLP dollar stores--being deal-driven, treasure hunt, and affinity/Ollie's Army based--had there been a notable budget-based consumer spending pull-back, that would have revealed itself in Ollie’s results and management’s comments.

Moreover, the strength was broad-based with over 60% of the product categories seeing positive comparable sales growth in the quarter and margin rich; gross margin increased +290 bps to record Q4 levels and helped in producing a +46% increase in earnings. The top performing categories were food, seasonal, candy, housewares, and sporting goods. On top of that, CEO John Swygert said, “We feel very good about the underlying trends in our business and our focus on long-term growth. We recently completed our latest third-party real estate feasibility study, which utilizes demographic data and density across a changing U.S. landscape. The migration trend out of larger metropolitan markets into rural and suburban areas over the past few years is a positive trend for Ollie's, and our analysis supports a new long-term target of 1,300 stores, up from a previous 1,050...In fiscal 2024, we are targeting to open approximately 50 new stores [representing 10% growth] with a good portion of these in existing markets and the Midwest. In addition to opening new stores, we continue to upgrade our existing stores through our remodel program. Over 10% of our store base has now been remodeled, and we are applying our learnings to both existing stores and new store design.”

Regarding Ollie’s merchandise offering and its customer, Swygert said, “Today, consumers are looking for bargains, and manufacturers are looking for trusted partners who can help them manage their inventory and supply chains. Larger retailers are being supplied by larger manufacturers, and this led to larger orders and product flow. At the same time, manufacturers are constantly developing and introducing new products, new packaging and working around endless changes and disruptions to the marketplace and supply chain. This is driving strong growth in the closeout market. We are the king of closeouts, and we are built for this environment. Nobody has our experience, size, scale and credibility in the closeout market. With over 41-year history and extensive relationships, manufacturers know we are a trusted and reliable partner for excess and closeout products. As a result, our purchasing power is growing, and we are becoming more and more meaningful to the vendor community. We have made significant investments to enhance execution and drive productivity. . We have enhanced major operational teams such as the supply chain, loss prevention, real estate, and marketing, expanded our distribution capabilities, implemented new technology and systems initiated a store remodel program and retooled our marketing campaigns and expanded our digital capabilities...On the marketing front, we continue to shift advertising dollars into various digital and social media platforms, including influencers across TikTok, Instagram, and Facebook. For Black Friday and Christmas, we tested a series of video ad formats that generated millions of views and over 1 billion impressions in Google channels, including YouTube.” (Recall that Ollie’s has a strong loyalty program with its 14M member Ollie's Army making up 80% of sales. Ollie’s drives visitation and engagement with campaigns which promote items that are in limited supply and which are liquidation sales, meaning if you don’t buy it today, it will be gone tomorrow.)

Schedule a Call

Please enter your email

Thanks for reaching out!

I’ll be in touch soon

Go Back
Oops! Something went wrong while submitting the form.

Thomas Paulson

Director of Research and Business Development,

Thomas Paulson spent 20 years as a Wall Street analyst and a member of asset management teams at AllianceBernstein and Cornerstone Capital, representing top-50 ownership positions including Target, Home Depot, Nike, Amazon, Google, and many more. He brings consumer related expertise and knowledge of enterprises in retail, CPG, financial services, telecom, and entertainment.

Schedule a Call
Related Articles