Discount retailers like Dollar Tree (DLTR) and Dollar General (DG) are some of the worst performers in the S&P 500 index this year. DLTR has slumped by 50% in 2024, bringing its market cap to $15.8 billion while DG has slumped by over 36%.
Specialty retailers are struggling
Other discount companies are not doing well. Big Lots has filed for bankruptcy while Five Below (FIVE) stock has plunged by 55%, valuing it at $5 billion.
This performance is a harsh reversal for companies that did well a few years ago as soaring inflation pushed people to their stores.
Most notably, their plunge has also coincided with the sell-off among other specialty retailers. Ulta Beauty, which focuses on beauty products, and which counts Warren Buffett as an investor, has dropped by almost 18% this year.
Specialty pharmaceutical companies are also struggling. Walgreens Boots Alliance (WBA) stock plunged so hard that it was kicked out of the blue-chip Dow Jones Industrial Average while CVS Health has dropped by over 27%. Rite Aid, which used to be the third-biggest player in the industry, has filed for bankruptcy.
On the other hand, leading retail brands are thriving. Walmart stock has soared to a record high, giving it a market cap of over $600 billion. As a result, three of the Walton family appear among the top 20 of the world’s richest people with a combined net worth of over $300 billion.
Costco stock has also jumped to its highest level on record while BJ’s Wholesale Club has jumped by 21.50% this year, valuing it at over $10 billion.
This performance means that more shoppers are favoring large brands at the expense of the specialty companies like Dollar Tree and Dollar General.
Dollar General’s weak earnings growth
Dollar General has had a good top-line performance in the past few years as high inflation has pushed more people to discount stores. As a result, its annual sales jumped from over $27 billion in 2020 to over $38 billion last year.
However, high inflation meant that the company had little room to adjust its prices since it prices most of its products for just a dollar. Also, the company has seen substantial wage inflation as the average wage growth in the US has jumped.
As a result, while its top-line growth jumped, its annual profit slowed from $1.7 billion to $1.6 billion in the same period.
The most recent results showed that its net sales rose by 4.2% to $10.2 billion while its same-store sales rose by 0.5%. However, its operating profit dropped by 20.6% to $550 million while its forward guidance was weaker than expected. In a statement, the CEO said:
“Despite advancing several of our operational goals and driving positive traffic growth, we are not satisfied with our financial results, including top line results below our expectations for the quarter.”
Dollar Tree’s weak financial results
Like Dollar General, Dollar Tree’s revenues have soared from over $23 billion in 2020 to over $30.5 billion in 2023. Its profitability has also come under pressure, with its net profit moving from $827 million to a $998 million loss last year. Its loss in the trailing twelve months stood at over $1 billion.
Dollar Tree, the parent company of Family Dollar, said that its same-store net sales rose by 1.3% while its consolidated net sales rose by just 0.7% to $7.3 billion. It also reduced its forward guidance for the year, with sales expected to be between $30.6 billion and $30.9 billion.
The most notable statement was that the company was considering strategic alternatives for the struggling Family Dollar business, which it acquired in 2015 for $8.5 billion. With the combined entity now valued at $15 billion, there are concerns that the purchase has not worked out as planned. The CEO also warned about the challenging environment, saying:
“We are encouraged by the continuous progress we are making in the transformation underway at Dollar Tree and Family Dollar, despite immense pressures from a challenging macro environment.”
Outlook for Dollar General and Dollar Tree
The ongoing slump of DLTR and DG stocks has left companies that are trading at a significant discount compared to the market and their peers.
Dollar General trades at a forward price-to-earnings ratio of 14.8 while Dollar Tree have multiples of 13.7. These valuations are significantly lower than the S&P 500 P/E multiple of 21 and Walmart’s 32.
I believe that these companies are going through a cycle, which has been driven by inflation and weak consumer spending. Many consumers have also embraced popular subscription products like Walmart+ and Amazon Prime, which ensure free deliveries.
Therefore, the current volatility and downtrend may continue for a while. However, the stocks will likely bounce back in the long term as the macro climate improves.
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