For several weeks, we’ve been writing about the lower-income consumer being under more economic pressure, resulting in a worsening trend for discretionary spending at Family Dollar and Dollar General. For Target and Walmart, the trend was “less bad.” So, how do we explain the stronger trend at Citi Trends and dd’s Discounts, two brands that should be front and center for curtailed trips and sales?
We believe there are six primary reasons for the outperformance of Citi Trends and dd’s over Family Dollar’s and Dollar General’s discretionary side.
- (1) Citi Trends and dd's offering is treasure hunt value versus everyday low prices. Treasure hunt value (and shopping as entertainment) has been the winning formula for all levels of income for the past two years; moreover, it is widely celebrated on social media and by influencers. We also see evidence of the current appeal in treasure hunt in the positive traffic trends for secondhand retail as shown in the figure below for Goodwill, Plato’s Closet, and Savers Thrift Stores.
- (2) Consumers are looking for prices to be lower than they were last year. Walmart is offering lower prices on discretionary merchandise by a mid-single-digit percentage or more. It's unlikely that the dollar stores are matching those discounts, However, given CitiTrends and dd's higher inventory turns, more frequent flow on newness, and more agile buying process, they are likely reacting as needed, while preserving their merchandise margin.
- (3) Citi Trends and dd's product assortment is 100% discretionary products versus 20% at Family Dollar and Dollar General. For dollar stores, there is more emphasis on the non-discretionary merchandise at the moment. As such, we suspect that the 20% just isn’t getting the full attention at the moment, as management works to grow the 80%.
- (4) Citi Trends and dd's assortment is primarily apparel & accessories, whereas dollar store discretionary is apparel, home, seasonal. Dollar stores' broader assortment creates additional complexity and a broader level of competition, including Temu.
- (5) Easy year-over-year comparisons. Citi Trends and dd's had executional mistakes in the first half of last year. For example, Dollar General produced -7% discretionary comps in the first half of 2023, while Citi Trends was down -10% reflecting not being trend-right, having too high of price points, and not having enough freshness flowing onto the stores’ racks and shelves.
- (6) The base level is easier for Citi Trends and dd's as the multi-year comparison to 2019 is lower. For Citi Trends, last year’s first half was down -14% to 2019, whereas Dollar General was +2%.
Ross Stores (dd’s parent company) CEO Barbara Rentler recently said, “dd's shoppers responded favorably to its improved value offering. In the newer markets, we are in the process of updating the assortments to better address the different tastes and preferences of this diverse customer base. We will continue to make ongoing adjustments over time to better position dd's for the future.” We take the comment to imply that dd's average ticket price declined by a low-single-digit rate. dd's has produced 400 basis-point higher level of average traffic per location versus CitiTrends the past few months. CitiTrends pulsed the business hard going into Easter, as shown in the traffic chart below. We will watch Q2’s trends closely to see if they do the same for Juneteenth and July 4th.
Citi Trends CFO Heather Plutino shared, “These Q1 wins were assisted by our inventory rebuilds and targeted product categories combined with our buy team's continued focus on making wide inventory investments, maximizing markup, while also providing incredible values for our customers. Early in the quarter, we felt the impact from the slower start to the tax refund season as well as unfavorable spring weather patterns. However, we posted positive comps in each month of the quarter. We also experienced an improved trend in store traffic, with basket size similar to last year and continued healthy in-store conversion. These key performance indicators are proof points that our unique assortment curated specifically for our African-American and multi-cultural customers resonated.
While Citi Trends is dd's nearest public company peer, the table below shows that they are quite different businesses with over five times the visits and revenue per location. Interestingly, Citi Trends generates more gross profit dollars per employee ($59K) than the consolidated Ross Stores ($52K) because its gross margin rate of 38% is materially above Ross' 27%. Given that dd's is investing more value into its offering, one might casually view that as the competitive risk for Citi Trends is higher. However, Placer allows for a more nuanced, holistic understanding.
Placer shows that the trade areas for the two chains are very different (below). Citi Trends' trade areas tend to more African American concentrated, while dd's trade areas tends to be more Latino.
There is ample cross shopping between these brands. Looking at two markets important to both brands--Atlanta and Miami--19% of dd's visitors also went into a Citi Trends, but that was far lower than the visitation to Ross Dress for Less (62%) and Goodwill (46%). For Miami, these figures were 75% and 28%. For CitiTrends in Atlanta, the figures are Ross (60%) and Goodwill (47%). And so, while there is overlap of customers between the two brands, the larger overlap for both is with Ross and Goodwill. and so focusing on dd's as a competitor to Citi Trends, or Citi Trends to dd's is to miss the bigger picture. To conclude, Placer shows that dd's and Citi Trends can outperform in a tougher economic environment for the lower-end consumer when they execute; additionally, despite much larger competitors (Ross, Walmart, Dollar General, Family Dollar) they can thrive given that they focus on their core consumer demo and lifestyle.
