Against Tariffs Uncertainty, Dollar Stores Show They Have A Sweet Spot In Retail

Dollar General is expanding even as many retailers are closing stores. — Dollar General shares rose to a record high Thursday after it reports better-than-expected fiscal Q1 sales. (Photo by Megan Morr/For the Washington Post)

The Washington Post/Getty Images

The often no-frills dollar stores are proving they have appeal, at least in terms of enticing low-income and other bargain-hunting shoppers.

Dollar General, the leader in the space, and Dollar Tree both saw their shares jump Thursday after they reported better-than-expected sales. At Dollar General, fiscal Q1 comparable sales, a closely watched performance metric that excludes the impact of newly opened and closed stores, rose 3.8% in the quarter that ended May 3. That followed 29 years of straight annual gains.

“We operate in the most attractive sector of retail,” Todd Vasos, Dollar General’s chief executive officer, said on a conference call Thursday, adding independent research showed the company has gained market share. “Our core consumers continue to come in more often and spend more. We are (also) attracting the higher-end consumer.”

In fact, he said those who “make a little more money” than its average low-income shoppers represents the fastest growing customer segment for Dollar General.

At Dollar Tree, same-store sales rose 2.2%, the 45^thstraight quarterly increase. Growth was led by its namesake chain as the retailer attempts a turnaround of its acquired and lagging Family Dollar chain.

Dollar General shares shot up 7.2% to close at a record high. Dollar Tree stock closed up more than 3%.

At a time when retailers including Victoria’s Secret and Gap are shrinking their physical footprints and others like Payless ShoeSource is liquidating, Dollar General, which had nearly 15,600 stores as of May 3 still is expanding.

The company has said it plans to open 975 stores this year and remodel or relocate 1,100 stores.

“Amidst a sea of uncertainty across retail, particularly in both apparel and at the high-end, we prefer the low-end today,” said Gordon Haskett analyst Chuck Grom in a report.

Part of dollar-stores’ increased appeal is their doubling down on convenience-store type offerings. Both retailers have added more coolers and freezers to stock perishable and other refrigerated items to attract customers. Dollar General in March also rolled out DG Fresh to take distribution of perishable items in house to help not only cut product costs but also keep them better in stock.

“Our cooler program continues to be one of the key drivers in our success so far in 2019 and what we’ve seen in the past,” Vasos said.

Both retailers also are expanding in non-consumable items like party merchandise that are more profitable than the traffic-driving daily essential goods. Dollar General, for instance, unveiled a Believe Beauty private-label cosmetics line and said it’s adding more home and seasonal merchandise, which Vasos said has had a positive “halo effect” in helping increase consumables sales also.

In April, it announced a partnership with Western Union to allow customers to transfer money at most of its stores, in another traffic-driving move.

Dollar Tree, for its part, has said it’ll add alcohol to 1,000 Family Dollar stores. At its eponymous 7,100-store chain, long known for selling everything for $1, it’s begun testing selling products at more than $1 at some stores.

That move, while at risk of alienating some shoppers, could be necessary especially as dollar store chains are bracing for different cost pressures. Both companies, for instance, said higher fuel prices have increased transportation costs.

Meanwhile, should the U.S.-China trade war escalate that results in the U.S. imposing tariffs on another $300 billion worth of Chinese imports, that would result in higher prices its customers pay, both said. Like other retailers, both companies said they are trying to “mitigate” the impact, including diversifying sourcing to other countries and redesigning merchandise.

“We watch price very closely,” Vasos said. “We are doing everything to soften the blow.”

In their most recent annual reports, both companies cited the tariffs war as a risk factor. China represents a “substantial” amount of imported merchandise, both said in the filings.

If additional tariffs “are implemented, we expect that it will be impactful to both our business, and especially to consumers in general,” Dollar Tree President and CEO Gary Philbin said in a statement.