Dollar stores can serve as inflationary plays for investors as buyers try to stretch their budgets. Prior to their recent earnings report, some traders worried that Dollar General and Dollar Tree would underperform, especially now that stimulus payments released during the pandemic have faded. Those concerns grew after disappointing reports from Target and Walmart raised doubts across the group about the retailers’ ability to handle rising input costs. Instead, Dollar General and Dollar Tree’s quarterly earnings reassured investors that discounters offer several advantages during periods of high inflation. Not only do retailers have pricing power to pass on higher costs to consumers, they are also able to attract new high-income buyers who are trying to stretch their dollars and shrink business. “It’s the most difficult, unusual backdrop for retailers I’ve ever seen,” said Bradley Thomas, analyst at KeyBanc Capital Markets. “As we try to figure out how investors should best position their portfolios, one thing we try to fall back on is providing value to consumers, who have the potential to grow. There are opportunities, and who has defensive characteristics, all of which really stand out from Dollar Store,” he continued. The focus on value stocks of both Dollar General and Dollar Tree increased last week on the back of their quarterly earnings. Not only did both retailers beat expectations on earnings, revenue and same-store sales, they also raised their outlook for the year ahead, impressing investors. Shares of Dollar General were up 13.7% and Dollar Tree shares were up 21.9% on Thursday. For investors, dollar stores could be an attractive pick, especially as Wall Street considers recession risks in the second half of the year. Part of the appeal is their defensive qualities. Unlike big box retailers, which have more discretionary items to take up square footage in their stores, discount chains focus on groceries and other items that shoppers need on a daily basis, allowing them to cut household spending. relatively impervious to it. Their convenient location also helps boost sales. The ubiquity and small size of dollar stores put them within reach of many shoppers, with Dollar General reporting that they are within five miles of three-quarters of all consumers. Dollar General has 18,000 stores. Dollar Tree and its family Dollar business have more than 16,000 locations. That’s a significant advantage for both Dollar General and Dollar Tree as rising oil prices make consumers aware of their gas tanks — and as both retailers look to expand their store footprint even further. “Since the stores are so small, you can really pack a bunch of stores into one area,” said Anthony Chukumba, analyst at Loop Capital Markets. “You don’t need a huge population to support the store so you can keep the stores really close to each other and the stores can be productive.” The focus on value makes it easier for dollar stores to attract more affluent shoppers. During the most recent earnings call for Dollar General, CEO Todd Vasos said it sees its core customers making “deliberate” purchases and has attracted and retained a high-end consumer as a result of the pandemic. “So that tells you the trade-down and trade-in is alive and well and is probably starting to pick up steam as we move through Q2 and into the back half of the year as things continue to tighten ,” said Vasos. Meanwhile, Dollar Tree raised its price point in February to $1.25 in its stores, a decision that gives the discounter more flexibility to mix up their assortment of merchandise. It also has $3 and $5 price points running into more stores. KeyBank’s Thomas said, “The $1.25 price point will open up a number of levers that they can pull to improve merchandising by giving them a bit more leverage that they can reinvest in stores to improve the shopping experience and hopefully.” That can drive more traffic.” Some Key Differences Dollar stores have traditionally been regarded as a stable business in good times and bad. Dollar General reported steady growth in annual sales, reaching $34.2 billion in January 2022, up from the $23.5 billion reported in January 2018. Over the same period, Dollar Tree’s annual sales reached $26.3 billion in January 2022, up from $22.2 billion in January 2018. Value in US retail has been winning for a very long time,” said Citi analyst Paul Lejuez.[S]No matter what type of economic environment it is, price performs well. On a relative basis, in periods of financial crisis or consumer weakness, I think the relative outperformance is even more apparent.” In addition, they are expected to have in-store growth opportunities that are long-term investments, according to KeyBanc. There could be a tailwind for. Thomas. Still, there are some differences between Dollar General and Dollar Tree. While Dollar General has historically posted consistent results, analysts are looking for changes in Dollar Tree, which is looking for changes in its Family Dollar has struggled in the past due to underperformance in the business. In the month, Dollar Tree added new leadership, including John Flanigan and Larry Gutta, both previously at Dollar General, as heads of supply chain and merchandising, respectively. As in, to help turn Family Dollar around.” If they can continue this momentum and come along. A credible turnaround plan for Family Dollar, you know, this story could get even more compelling over time,” said Oppenheimer analyst Rupesh Parikh. Since Dollar Tree only took several months to switch to the $1.25 price point In the U.S., Parikh is also looking for more evidence that consumers will continue to shop at stores despite a more expensive basket of goods. Keeping an eye on Walmart Other concerns remain on the horizon. Discounters have pricing power because Walmart , which set the tone for the industry, is raising prices as the big-box company also deals with higher costs. However, signs of declining sales at Walmart may prompt management to slash prices to keep shoppers at bay. In 2016, Dollar General was forced to cut prices on staples like eggs and milk by up to 10% as Walmart began a price war to gain market share. “Walmart is playing well in the sandbox right now,” Citi’s Lejuez said. “One of the things I’ll keep an eye out for is, does Walmart continue to play nice? Or do they, at some point, get more publicity to try to take market share? That won’t be good for anyone. Which competes with Walmart.” For now, the big-box retailer is reporting strong in-store traffic.