Top Investment Manager Reveals: Dollar Store Chains Struggle Amidst Inflation Shock!
Many Americans love to hunt for bargains, and several retail chains have specialized in offering really cheap and basic goods. Goods that used to be priced at a dollar before the inflation shock hit, leading to company names like Dollar Tree and Dollar General.
These two chains have built a network of over 35,000 stores combined, but their growth has now started to slow down significantly. Last year, they already felt the impact of customers becoming more cautious and squeezed by high inflation, but this year, the cumulative effect of several years of cost crises seems to be taking an even bigger toll.
Dollar Tree was forced to lower its full-year forecast recently, triggering a stock plummet, despite Dollar General’s stock dropping by over 30 percent just a few days earlier when they also cut their forecast.
Analysts following the sector point to two main reasons for these setbacks. Firstly, core customers, consumers with relatively low incomes, are under intense pressure, and secondly, major competitors like Walmart and Target seem to be weathering the tough market conditions better. This suggests that they are gaining market share from the Dollar stores.
As the graph above shows, Walmart has also outperformed the discount retailers on the stock market this year, with the retail giant, valued at over $600 billion, rising by almost 50 percent.
Not only have stock prices plummeted for the Dollar store chains, but valuations have also taken a hit with reduced expectations. P/E ratios around 10 indicate both low growth expectations and potential upside if they can weather the storm.
As the table below shows, analysts see a lot of potential in the stocks based on the average target price. However, there is a risk that the recent negative news has not fully been factored into the forecasts and target prices yet, making it too early to bet on a turnaround in the stocks.
| Dollar Tree | Dollar General | |
| Year-to-date Stock Performance | -52% | -41% |
| 3-year Stock Performance | -26% | -64% |
| Market Cap, USD | 14.7 billion | 17.7 billion |
| Number of Stores | >16000 | >19000 |
| Operating Margin | … | … |
Analysis:
The Dollar store chains, Dollar Tree and Dollar General, are facing major challenges due to the impact of inflation on their core low-income customer base. With major competitors like Walmart and Target gaining market share and outperforming them on the stock market, these discount retailers are struggling to maintain growth. Despite reduced stock prices and valuations, analysts see potential in these stocks, but caution that it may be too early to expect a turnaround. Investors should monitor the situation closely and consider the risks before making any investment decisions.