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Dollar Store Round Up: Treasure Hunt Up, Everyday Low Prices Down

Thomas Paulson
Dec 8, 2023
Dollar Store Round Up: Treasure Hunt Up, Everyday Low Prices Down

As mentioned last week, Dollar Tree and Five Below have been advantaged versus other dollar store chains given their more affluent customer mix and strong execution on their treasure hunt merchandise strategy. This is especially true of Five Below, which not only drove a meaningful acceleration in its Q3 2023 comp to 2019 (+29%)--see below--but also +14% total revenue growth and on-plan new openings for the year (200).

An important driver to comp has been Five Below’s expansion into higher price points, versus the rest of retail where the comparable ticket is being driven by more units per transaction (UPT) and lower average unit retail prices (AURs). Comparable-store sales are also being driven by great visit frequency and transactions. Comparable transactions were up +3% year-over-year and up +5% compared to 2019. Placer shows visitors per venue up +4% versus 2019 and visits per venue up +12%. Wow!. Also of note, Five Below grew its Halloween business, whereas many other retail brands were “Temu-ed”. Five Below did so by expanding into the category with more Halloween Wow!, i.e. it had been underpenetrated in the category in prior years.

Like Five Below, Dollar Tree’s comparable-store sales was led by transaction count (+7%). Compared to 2019, the figure remains down 12% given the break in the $1 standard price point. Comparable transactions versus 2019 is up +37%. On a year-over-year basis, visitors and visits per venue were flat and +5%, respectively (indicating the visit frequency was a key contributor).

However, an important difference between Dollar Tree's brands and Five Below is sales mix. Dollar Tree's sales mix is roughly half consumables and half is non-consumables; for the quarter, its non-consumables business posted comps of only +1%, or less than Five Below. Dollar Tree’s consumables business (below) generated comps of +11% on a one-year basis and +21% on a two-year basis; that is the result of a significant expansion of SKUs for the category and disruptive low prices and value during a time of high inflation (a dynamic that has also driven outsized transaction and household growth for Grocery Outlet). As we discuss in the Kroger section below, should national branded grocery prices turn negative, we suspect that this year’s gains may prove to be ephemeral. Additionally, should prices turn negative that would fuel discretionary spending and non-consumables. In this scenario, we’d expect Five Below to post much stronger comparable store sales gains versus both Dollar Tree and Grocery Outlet due to these sales mix differences.

Source: Dollar Tree Q3 2023 Supplemental Financial Presentation

Q3 2023 profit growth was solid for Dollar Tree and Five Below, but not matching revenue growth because of higher shrink. Five Below CEO Joel Anderson stated, “We obviously think our mitigation efforts are working,” with the implication that there should not be a worsening of the shrink/theft headwind in 2024. Dollar Tree CFO Jeff Davis said, “Shrink results were mostly in line with our expectations.” All told, the shrink issue isn’t devolving, but unfortunately, it has yet to show improvement. That said, mitigation initiatives and less biting inflation will create the opportunity for improvement in 2024. As a reminder, returning to pre-pandemic levels is a major opportunity for retailer profitability. We expect some of that to flow through and some of it to be invested into price to drive units.

In contrast to gains by Dollar Tree and Five Below, Family Dollar and Dollar General suffered steep declines in their non-consumables business, as was the case for Target, Walmart, and other brands that have a high customer mix of lower-income households. For Family Dollar, its non-consumables business (representing 18% of its sales mix) posted comparable-sales declines of -12.5%. Its consumables business comped +6.2%, but the two-year CAGR slowed with inflation and decelerated throughout the quarter. Placer also sees that in visitation trends, especially for Family Dollar (below). Management also cited lower SNAP benefits and tax returns as headwinds. Based on other data that we’ve seen, we suspect that Temu took a bigger out of the business and visits. By contrast, Dollar General’s “seasonal” sales were more stable for the quarter at -4% on a comparable basis.

One thing that Family Dollar and Dollar General were counting on for 2023 was higher-income households trading down into their banners. That didn’t happen; Walmart and others kept those households. With that in mind and considering the risks of deflation and lower consumer spending in 2024, increased competition (including Temu and Walmart), it wasn’t surprising to hear that Family Dollar is going to make a broad re-evaluation of its footprint and store portfolio to “address underperforming stores.” The result of that evaluation is likely to be locations that are re-bannered, moved, or closed. No details were provided during its update call.
A similar dynamic holds at Dollar General, with fewer openings and relocations planned for 2024. We discuss the Kroger and Albertson’s merger below, but one of the larger themes that we expect to emerge in 2024 is consolidation in grocery and the consumables space, especially drugstores. During the past three years, the expansion of supply of consumables has been tremendous, it now looks like that expansion has exceeded demand as volumes are down at the retail level (in aggregate). What this looks like in terms of Dollar Tree compared to the market (-2.5% unit volume for two years in a row). Big Lots discussed the rising competitive intensity in consumables and stated that their planned expansion into the category wasn’t meeting management’s expectations. Exacerbating this burgeoning supply-demand imbalance is greater capacity for producing more private label products. Retailers are still recovering and ramping up their own private label business. For example, Family Dollar has a target of 20% by 2026, from the current level of 14%, i.e. packaged food prices in 2024 look increasingly deflationary. Earlier in the year, one of our forecasts was that private label would become the driver of the grocery category. That is the case now and we’d expect that to persist in 2024.

In terms of earnings results and cash generation for Family Dollar and Dollar General, it isn’t surprising that the financials appreciably deteriorated given the above dynamics. Family Dollar’s losses worsened and Dollar General experienced a 40% drop in profits. Dollar General’s earnings release quotes returning CEO Todd Vasos as saying, “While we are not satisfied with our financial results for the third quarter, including a significant headwind from inventory shrink, we are pleased with the momentum in some of the underlying sales trends, including positive [comparable transaction growth], as well as market share gains in both dollars and units [in consumables]. We continue to believe our model is relevant in all economic cycles, and we are working diligently to further enhance our unique combination of value and convenience. With that in mind, we are pleased to announce today our real estate growth plans for fiscal year 2024, which include approximately 2,385 projects in total, including 800 new stores, 1,500 remodels, and 85 relocations. This is a modest slow down compared to the number of projects (from 1,000 new, 2,000 remodels, and 100+ relocations) in recent years, which we believe is prudent in this environment.”

Dollar General’s earnings call was the first public opportunity that Vasos had to share with General’s stakeholders what he intends to do. Vasos noted:

“This is not about rebuilding a team or organization, but about refocusing efforts already underway...Our stores, where everything begins and ends for our customer. As we drive improvement across our store footprint, we are doing so through the lens of our customer. As we have previously announced, we are investing approximately $150 million in store labor hours this year...With that in mind, we have made the decision to redeploy labor hours away from smart teams and instead, more directly to our store teams and a greater emphasis on customer service and store-level inventory management activities. To that end, I want to highlight two areas of focus we believe will drive the greatest improvement in our stores. First, we plan to increase the employee presence at the front-end of our stores, and in particular, the checkout area. While self-checkout has contributed to the convenient proposition for our customers in certain stores, it does not reduce the importance of a friendly, helpful employee who is there to greet customers and assist while the checkout process is happening. We have already begun by allocating more labor to front-end activities and clearly communicating our expectations around the visible presence of an associate at the front of our stores. Second, we are reemphasizing the role played by our store teams in our perpetual inventory management process which we believe will positively impact our on-shelf availability as well as our customers' convenience perception in our sales.

We are also reducing the span of control for our District Managers which will provide more opportunity for engagement with our store managers and their teams and more consistency and execution across the store base. As we take these actions and focus on the basics in our stores, we believe we will see improved retention at the store manager level where our turnover is currently higher than we liked, and we know from experience that when we stabilize the store manager position, the entire store and team benefit, which ultimately drives a more positive experience for our customers as well as improved sales and shrink results.

Finally, I want to speak to our focus on fundamentals in merchandising…For our merchants, there is no greater priority than offering great value of the products our customers want and need. Our customers are often living paycheck-to-paycheck and continually tell us that value is the most important factor in their shopping decisions...we are taking a hard look at what else we can do to drive value for our customers in this challenging economic environment, including highlighting private brands and other opportunities for savings as well as maximizing the effectiveness of any promotional activity to drive traffic and share growth. Beyond these opportunities for our customers, we have also challenged our merchants to consider how they can drive simplification for our stores and supply chain as well, with meaningful SKU rationalization as one of the most immediate areas of focus...We all know that driving traffic and market share are essential to long-term retail success, and while our results have been improving in these areas, we are still not satisfied with our current position. We believe we have identified actions that will pay dividends over both the short- and long-term as we remain focused on driving profitable sales growth.”

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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.

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