In the week of Aug. 24, dollar store bellwethers Dollar General (NYSE: DG) and Dollar Tree (NASDAQ: DLTR) reported quarterly earnings. The results were the same…as was the market reaction. That reaction, combined with renewed concerns about inflation, may limit gains in both stocks.
The headwind that hung over the headline results from each company was the consumer. Dollar stores cater to lower-income consumers. Dollar General takes that one step further with a business model that ensures its stores are located in areas that are a short drive for its consumers.
However, the health of that consumer told the real story of this earnings season. Both dollar stores reported that lower-income consumers were limiting their discretionary purchases to focus on staples. Data like this reinforces the idea that a bifurcated consumer is a key consideration for retailers heading into the all-important holiday season.
On the other hand, like Walmart (NASDAQ: WMT), Dollar General and Dollar Tree reported increased traffic from higher-income consumers who are looking for value. That lays out the investment case. Will higher-income consumers drive future results for dollar stores, or will a stressed core consumer put a lid on future gains?
Dollar General: Traffic Keeps Coming Back
Dollar General’s second-quarter report gave investors plenty to like on the surface. Net sales rose 5.2% to $11.3 billion, while same-store sales climbed 3.5%, split between a 2% gain in customer traffic and a 1.5% increase in average ticket. That marked the fifth straight quarter of traffic growth and the sixth consecutive quarter of positive comps across all four merchandising categories — consumables, seasonal, home products and apparel all posted gains.
The bottom line looked even better. Operating profit jumped 29.2% to $769.2 million, and diluted EPS surged 33.3% to $2.48, helped by an estimated $0.25 per share benefit from tariff refunds. Gross margin expanded 127 basis points to 32.6%, aided by those refunds along with a lower LIFO provision and reduced distribution costs. CEO Todd Vasos called the results a “testament to the strong execution” of the company’s turnaround strategy, and the traffic trend backs that up — it’s harder to dismiss as a one-quarter blip when it’s now stretched across more than a year.
Management used the strength to raise full-year guidance across the board. Dollar General now expects net sales growth of 4% to 4.3%, same-store sales growth of 2.5% to 2.9%, and diluted EPS of $7.80 to $8, up from a prior range of $7.20 to $7.45. The company also plans to repurchase up to $700 million in stock this year and continues to pay a quarterly dividend of 59 cents per share.
Dollar Tree: Margins Do the Heavy Lifting
Dollar Tree’s quarter told a similar growth story with a different engine underneath. Total sales rose 7.0%, and comparable store net sales increased 3.7%, but unlike Dollar General, the gain leaned heavily on ticket, up 3.3%, while traffic contributed just 0.4%. That’s a subtle but important distinction for a stock now trading as a standalone business following last year’s Family Dollar divestiture.
The headline numbers were flattered by tariff refunds. Diluted EPS came in at $2.70, including a $1.31 per-share benefit tied to the net impact of those refunds, and operating margin expanded 900 basis points, 650 of which came from the same source. Strip that out, and the underlying improvement still reflects real progress: the multi-price rollout now covers roughly 6,600 stores, and discretionary categories are gaining share as the format matures.
Dollar Tree used the quarter to return $605 million to shareholders through buybacks and raised its full-year adjusted EPS outlook to a range of $7.70 to $8.05. Its third-quarter guidance calls for comparable sales growth of 3% to 4%, though adjusted EPS of $0.80 to $0.95 will absorb roughly $0.50 per share in reinvestment costs tied to those tariff refunds.
Two takeaways for investors. First, this quarter’s tailwind won’t repeat indefinitely. Second, with the Family Dollar overhang gone and the balance sheet holding $1.1 billion in cash, Dollar Tree now has more room to keep investing in its stores without leaning as hard on financial engineering to show progress.
Tale of the Tape: The Charts Look Very Similar
As you might expect, the stock charts for DG and DLTR look remarkably similar. Both stocks dropped sharply in the first half of the year. Both have recovered in the last three months and now sit right around their respective 50-day simple moving averages.
The Relative Strength Indicator for each is supportive of a bullish move higher. However, neither stock is displaying particularly strong momentum. While that could prevent a bullish rally, it’s also a sign that much of the pessimism may already be priced in.
Which Dollar Store Stock Offers Better Upside?
Analysts are generally bullish on each dollar store. However, Dollar General may be the better choice for investors who are choosing between the two. For starters, DG has more current upside to the analysts’ consensus price targets and is trading almost exactly in the middle of its 52-week range.
Income investors get another benefit with Dollar General: that 59 cents-per-share dividend. The yield of 1.93% as of this writing isn’t particularly impressive. However, the dividend has a payout ratio of around 30%, making it a safe choice for investors who rely on the income for current cash or as part of a reinvestment strategy.
Investors can’t change the state of the consumer, which is likely to be in flux for several quarters. But that doesn’t mean that they can’t profit from that uncertainty. The strong earnings reports from Dollar General and Dollar Tree are reminders of the fundamental strengths that each dollar store offers. That strength can help you weather the current uncertainty and set you up for meaningful upside when the company’s core consumer is on firmer ground.
