2022 has been a dynamic year for the dollar store industry due to the high rate of inflation and the lapping of last year’s stimulus. However, from the perspective of three-year comp CAGRs there is remarkable consistency across quarters and brands. The one brand that has seen its sales momentum accelerate is Family Dollar, which is under new leadership and is investing in price and merchandise to demonstrate better value to its customers. Thus far, the better sales trend is not coming at the expense of its most direct competitor Dollar General. As a reminder, Family Dollar is more urban markets and Dollar General is more rural/suburban markets. That said, Family Dollar’s presence is of impact to Dollar General, as Family Dollar shares 28% of Dollar General’s households; inversely, Dollar General shares 53% of Family Dollar’s households. As such, in an eye-to-eye battle, the General would win. The two are not eye-to-eye yet and when asked about it, Dollar General CEO Jeff Owen answered, “We're taking share and feel that will certainly do very well...Structurally, we feel we're well positioned in terms...of wages, we feel we're well positioned in terms of applicant flow and staffing levels. We feel we're investing appropriately in the business. We feel that our pricing is very appropriate."
Family Dollar’s momentum is also evident in our YoY visitation data, which consistently outpaced Dollar General during fiscal 3Q22 (below). In the year ahead, we will closely watch Family Dollar’s visits and True Trade Area dynamics to see if it can build upon this year’s momentum. In past years of economic stress, the dollar stores have won visits and market share as their less-affluent customers seek to shop for extreme value, a smaller basket, and a shorter distance (gas savings). Thus far, Walmart has grown its customer base (per Placer.ai data), and its three-year CAGR has improved as has its comparable traffic and transactions. In contrast, last year Target picked up a lot of less-affluent households last year, but our data suggests that they may now be losing them (a more detailed analysis can be found here).
Key Dollar General Metrics
- Dollar General's 3Q22 update was a difficult one for incoming CEO Jeff Owen, as the company's outlook was weighed down by, "significantly higher than anticipated cost pressures, including challenges within our internal supply chain, sales mix pressures, and higher inventory damages and shrink…[In addition], customer behaviors in 3Q22… indicates they are feeling increased financial pressure, including reductions in the number of items purchased per basket and in discretionary spending, which was softer than anticipated during the quarter. Customers also continued to shift spending to more affordable options, such as items that are dollar price point and private brands, while also shopping closer to payday at the first of the month." (We view most of these pressures to be transitory.)
- On pOpshelf, Owen shared, "We remain on track to nearly triple the standalone pOpshelf store count this year, which would bring us to a total of nearly 150 stand-alone pOpshelf locations by year-end. Looking ahead...our real estate plans for 2023 include opening approximately 150 additional locations, bringing the total number of pOpshelf stores to about 300 by the end of 2023. Overall, we remain excited about the pOpshelf concept and our goal of approximately 1,000 locations by year-end 2025."
- Regarding DG Fresh, the company noted, "We offered Fresh produce in more than 3,000 stores at the end of 3Q22. Looking ahead, plan to add produce in approximately 2,000 stores in 2023, for a total of approximately 5,000 stores by the end of next year". Overall for 2023, the company plans "to execute approximately 3,170 projects in the United States in 2023 across our Dollar General and pOpshelf banners, including 1,050 new stores, 2,000 remodels and 120 relocations." Longer-term, “we see more than 16,000 total opportunities for small box retail stores in the United States, including more than 12,000 for Dollar General stores, approximately 3,000 for pOpshelf and approximately 1,000 for DGX."
- Trailing-twelve-month (TTM) sales per square foot increased $2 QoQ to $266. Over the next year, the figure should climb to $277. Sales are being driven by consumables, while its other categories are down on a comparable basis. The overall comparable-stores sales increase was driven by both comparable ticket and comparable transaction growth.
- TTM EBITDA and free cash flow (FCF) went from $3.8B and $1.3B, respectively, in 3Q21 to $3.9B and $0.5B in 3Q22. FCF deteriorated as Dollar General had challenges receiving and flowing goods. Owen noted, “As we moved through 3Q22, we experienced unexpected delays in opening additional temporary storage facilities, primarily due to external challenges such as permitting. At the same time, seasonal goods came in earlier than anticipated. The resulting constraints from these factors led to more than $40 million and additional supply chain costs in 3Q22 compared to what we had previously expected. These costs included retention fees incurred for delays in returning shipping containers. Costs associated with inefficiencies in moving freight within our distribution centers and higher transportation costs as a result of servicing stores from less-than-optimal distribution center alignments.” (We also view most of these dynamics to be transitory, but it does highlight that running multiple banners adds to the enterprise complexity which increases the chance of miss-steps. The TTM financial metrics should march higher over the next year.)
Key Dollar Tree Metrics
- Dollar Tree's comparable-store sales increased by +7.5% leaving the two- and three-year CAGRs similar to 2Q22. Comparable ticket growth continues to be the sales driver at +13% and that reflects the transition to a standard $1.25 price point from $1.00. Comparable transactions continue to decline (-5%), which reflects both a decline in store traffic and the conversion rate (based on Placer data). In 2Q22, the decline in comparable transactions was all due to a lower conversion rate. The slip in traffic would seem to be the consequence of inflation suppressing traffic from lower-income households (i.e., a drop in engagement, which is something that Target also experienced).
- Trailing-twelve-month (TTM) sales per square foot increased $3 QoQ to $216 and is likely to climb to around $230 next year. That increase is the consequence of success with the higher standard price point and the expanded selection of $3 and $5 price points (which includes more offerings of protein, pizza, breakfast items, and family sizes).
- 23 new locations were added during the quarter, bringing the total to 5,455. Dollar Tree Plus ($3 and $5 price assortments) has reached 2,350 locations.
- Profitability moved meaningfully higher as a consequence of the higher standard price point; however, on a two-year basis and compared to 2019’s level the momentum slowed giving rise to some concern about the sustainability of that price point and the margin rate. Also similar to Target and other retailers, shrink is becoming a larger hit to profitability (a 100 bps hit is 20% of the company's profits, without putting higher prices onto honest consumers to make up for the theft).
- TTM EBITDA increased by $218M QoQ to $2.8B. Given the macroeconomic pressures on most of Dollar Tree’s customers, it will be a win if management can move EBITDA higher over the next year.
Key Family Dollar Metrics
- Family Dollar comparable-store sales increased +3% with comparable-transactions moving to positive. The improvement also drove the two- and three-year CAGRs higher. As a reminder, Family Dollar is making “price investments” to bring it more in line with Dollar General. Family Dollar’s gross margin rate (flat ex-higher shrink) and comparable ticket (+160 bps QoQ) reveals that they are being highly surgical with those price investments and compensating with price increases in other categories and markets. (Which likely is what’s behind General’s comfort with the level of price competition in the market.) That noted, given the upward turn in comp-transactions in a difficult macro environment where lower-income households have curtailed store visits, they are making progress. Executive Chairman Rick Dreiling called out progress in improving store standards (an investment that shows up in higher SG&A) and that progress can be measured in the higher comparable transactions. Increased marketing investment is also a driver. Dreiling noted, “We are extremely focused on driving sales per square foot, unit sales growth, and transaction count growth.”
- On the mood of the Family Dollar customer, CEO Mike Witynski stated, “Once they're inside the store, we're seeing shifts in their behavior where they're very consumable and needs-based focused to try and make that budget work and stretch it over the month. We're seeing private brands now for 39 weeks in a row have outpaced national brands…We have not seen that the prior 5 to 7 years where private brands were outpacing national brands, but it's now been 39 weeks in a row…We're seeing our SNAP and food stamp business is growing, and we continue to see credit as outpacing debit.”
- Trailing-twelve-month (TTM) sales per square foot improved by $1 QoQ to $211 and is likely to climb higher over the next year. Focusing on consumables is also a traffic driver. With food-at-home inflation is running at +12% YoY and consumables comps were only +4.7%, Family Dollar is winning with smaller sizes, weight-outs, and private brands. Management shared that October was the strongest month for comps; given that Placer shows October being the weakest month for traffic, that implies higher conversion rate which is confirmation of Family’s dollar’s success in providing the right merchandise at the right value and the improved store standards.
- 79 new locations were added during the quarter, bringing the total to 8,179. The combo-format (Family Dollar + Dollar Tree) now has 700 locations.
- Profitability moved to a loss as Family Dollar is investing in price, higher service levels, wages, and store repairs. Shrink was also a material headwind.
- TTM EBITDA declined $45M QoQ to $489 and it will be a victory if the figure can move higher over the next year
- Inventory turns for Dollar Tree Inc. (Family Dollar and Dollar Tree consolidated) deteriorated QoQ and are down 20% YoY due to investments in inventory to support multi-price points. That deterioration, combined with the lower EBITDA, dropped TTM FCF from $120M LQ to a negative $46M.
- In terms of other developments, Executive Chairman Rick Dreiling shared that the remaking of the company’s executive team is now complete.