The past two years have been challenging for dollar stores, as their core low-income consumers have faced significant economic pressures. Meanwhile, middle- and higher-income households experienced more economic stability, limiting the expected "trade down" into the dollar channel. Additionally, competitors like Walmart and Aldi gained market share in consumables by offering better value (lower cost per pound) and capitalizing on the shift toward fresh foods—a category where dollar stores remain underdeveloped. Other hurdles for dollar stores included high shrink rates, service level and supply chain issues, market saturation concerns, and executive turnover.
Temu has also posed a challenge, particularly in general merchandise. While dollar stores were hesitant to directly attribute weak general merchandise sales to Temu, other retailers like Etsy and Joann have been more forthcoming. However, as we noted in a recent article, Temu's impact appeared to lessen this fall, particularly for secondhand stores that were heavily affected during Halloween 2023. Recent discussions with retailers and manufacturers further support the view that Temu's disruption has diminished, with strong Halloween performance reported by most. This trend bodes well for the upcoming Christmas season and 2025.
Dollar store results this past week affirm this view, particularly in general merchandise, where Temu competes. Over the past three months, all major dollar store brands showed improvements compared to the previous three months. Black Friday weekend was especially strong, with a +9% year-over-year increase in visits compared to Black Friday 2023. Additionally, dollar store management teams reported a more optimistic outlook for middle-income consumers, whose loosening purse strings are beginning to drive visitation growth.
Below, we review key Q3 2024 takeaways from dollar and discount stores:
Five Below Delivers Strong Recovery with Treasure Hunt Strategy and Operational Gains
Five Below reported a strong recovery in comparable sales, rising to +0.6% from last quarter's -5.7%, with significant improvements in two- and three-year CAGRs. Both comparable transactions (-0.6%) and average ticket (+1.2%) contributed to the improvement, supported by flat traffic per location per Placer data. The retailer’s focus on its "treasure hunt WOW!" merchandise strategy appears to be resonating, as demonstrated by an increase in dwell time (from 25.3 to 26.1 minutes) and a substantial 71% rise in operating income, driven by strong gross margin expansion. Five Below COO Ken Bull said, "We were encouraged to see the positive results from the initiatives we took to add newness and deliver value, especially in our beauty, Halloween, tech and games and toys categories…Halloween across the board did really well for us and that was not just in the seasonal category, but within other categories that performed well."
Bull continued, "One of our key differentiators has always been the ability to quickly identify trends and capitalize on them. With the teams back together in the office, we have seen positive momentum towards greater innovation and speed driven by improved collaboration and communication across multiple groups, including merchandising, product development, sourcing, planning, allocation and visual merchandising. We believe our merchant teams are now better organized and equipped to quickly capitalize on trends and innovate. They have a renewed focus on sourcing truly amazing trend-right items that deliver quality, value and WOW! for our customers. Work is underway to drive broader and more consistent category and world performance with an improved key item approach, better SKU rationalization and productivity and sharper value… On to store experience. Our store experience is also a key differentiator for Five Below. We aim to be the cool store for kids and the destination for a fun treasure hunt experience. We have invested in our stores by increasing labor and streamlining operations to enhance the experience for both our customers and crew. We added more labor into the stores this year, beginning in August and have begun creating work efficiencies and reducing tasks for our crew."
Dollar Tree's Mixed Results and Family Dollar's Sequential Improvements
Dollar Tree--which offers similar treasure hunt general merchandise, but more focused on adults--experienced mixed performance, with consumables comparable sales up +6.2% but general merchandise down -1.8%. While comparable transactions improved (+1.5%), two- and three-year CAGRs deteriorated. Placer data showed flat visits per location and a slight decline in dwell time. Operational challenges such as high markdowns, distribution inefficiencies, and store reinvestments led to declining profit margins. Interim Dollar Tree CEO Mike Creedon noted, "Some Q3 category highlights at our 3.0 stores, we saw a 7% comp across our full seasonal assortment, including a 10% comp for Halloween-specific products."
Regarding the consumer, Creedon said, "Turning to the current environment and tone of business. Customers continue to seek value, and many are focused on buying for need and buying closer to the time of that need. We continue to see evidence of belt tightening, particularly among lower-income customers, and to a lesser extent, among middle- and higher-income families with young children. (i.e. the high cost of childcare is robbing wallet share from discretionary.) While this dynamic remains a discretionary headwind, it does create some opportunities across both banners and consumables. As consumption data shows, lower- and middle-income households are increasingly shifting more of their spending toward food at home."
The Family Dollar business showed sequential improvement, with comparable transactions up +1.8% and two- and thee-year CAGRs remaining relatively stable quarter-over-quarter. According to Placer data, average visits per location increased by +5% year-over-year, driven by higher comp transactions and the conversion or closure of 520 underperforming locations during the period. While the consumables category, which comprises 82% of the sales mix, softened, the discretionary segment showed improvement, likely due to reduced competition from Temu. In the second half of 2023, discretionary sales were down -13% on a comparable basis compared to a -5% decline in first half of 2024, when Temu's presence was minimal. Unlike Dollar Tree, Family Dollar's slightly stronger sales, combined with improved operating performance, resulted in significantly higher profit margins and a return to positive operating profitability.
On Family Dollar’s improved retail results, Creedon noted, “In recent quarters, we adjusted our pricing strategy with more emphasis on value and higher-frequency purchase items like everyday home essentials. As part of this strategy, we increased the number of items priced at or below $5. We updated our in-store signage and shelf strips to better communicate our price value image, and we identified additional ways to optimize our planograms to drive sales and space productivity. These initiatives are clearly resonating with our core Family Dollar customer, and we are seeing the positive results at the cash register. We are also pleased to report that Family Dollar's renovation and store conversion program is generating positive results. Since the beginning of the program in 2022, we have completed over 1,500 projects and year-to-date comps are up by high single digits at our H2.5 format stores and by double digits at our urban extra small box format stores. As a reminder, these formats feature customized product assortments that better meet the needs of our diverse customer base. For example, H2.5 stores include additional coolers, expanded seasonal offerings and an enhanced shopping experience with customized end caps and space optimization that drive better unit economics.”
Dollar General's Progress and Investments
Dollar General, closely aligned with Family Dollar but three times larger in revenue, reported improved sales and margin performance during Q3 2024. General merchandise and seasonal categories also showed positive momentum, with comparable sales rising +1.3%, driven by a +0.3% increase in comparable transactions and a +1.1% increase in comp ticket, which shifted from a decline last quarter. Placer data indicated a 3% year-over-year increase in average visits per location, reflecting gains in comp transactions and portfolio changes. The most notable year-over-year improvement was in basket size and mix, with units per transaction (UPTs) and average unit retail (AUR) both showing growth, likely influenced by hurricane preparation stock-up trips. The UPT growth was likely boosted to an extent by hurricane preparation stock-up trips. This suspicion originates because dwell time didn’t increase, suggesting there wasn’t a increase in browsing the store. On Halloween, Dollar General CEO Todd Vasos highlighted, "We were pretty pleased with our Halloween offering as well as the takeaway from the consumer on the discretionary side of Halloween. So not the candy side, while that was good as well, but the other side of that equation.” (i.e., strong performance in discretionary categories where Dollar General competes with Temu.)
Regarding efforts to enhance the Dollar General retail experience, Vasos stated, “Our customers rely on Dollar General for great value and convenience in friendly, easy-to-shop stores. We recognized areas where we were not consistently meeting this expectation and implemented several important initiatives to address them.” He cited significant progress in store cleanliness, organization, and customer service, reflected in unannounced store visits and improved customer satisfaction scores, which increased by over 900 basis points since Q1. In-stock levels also improved by approximately 180 basis points from Q3 2020 to the end of Q3 2024. Vasos attributed these achievements to increased front-of-store employee presence and enhanced inventory management practices, emphasizing the company’s commitment to delivering a superior shopping experience."
