The two largest chains of dollar stores in the country posted higher sales and profits in their latest quarter, a sign that consumers are flocking to discount retailers as rapid inflation eats into their budgets.
Tellingly, both companies said on Thursday that higher-income shoppers were visiting their stores more frequently. The dollar-store business model — to attract consumers in rural areas and neighborhoods with fewer shopping options by offering prices that are lower than at local retailers — is designed to work even when its customers are hurting financially, as many are with inflation running stubbornly high.
In the past year, the majority of new customers at Dollar Tree had an annual household income of at least $80,000, Mike Witynski, the chain’s chief executive, said on a call with analysts. At its rival Dollar General, there was also growth in higher-income shoppers, which Todd Vasos, its chief executive, described as a push by more consumers to “seek value.”
Dollar General’s revenue rose 9 percent in the second quarter, versus the same period last year, to $9.4 billion, and its profit grew more than 6 percent. Dollar Tree’s revenue increased nearly 7 percent in the quarter, to $6.8 billion, and its profit jumped 27 percent.
“The consumer is trying to make ends meet, and when you have limited funds in your wallet, the dollar stores provide the ability to do that,” said Joseph Feldman, a senior analyst at Telsey Advisory Group.
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What is inflation? Inflation is a loss of purchasing power over time, meaning your dollar will not go as far tomorrow as it did today. It is typically expressed as the annual change in prices for everyday goods and services such as food, furniture, apparel, transportation and toys.
What causes inflation? It can be the result of rising consumer demand. But inflation can also rise and fall based on developments that have little to do with economic conditions, such as limited oil production and supply chain problems.
Is inflation bad? It depends on the circumstances. Fast price increases spell trouble, but moderate price gains can lead to higher wages and job growth.
Can inflation affect the stock market? Rapid inflation typically spells trouble for stocks. Financial assets in general have historically fared badly during inflation booms, while tangible assets like houses have held their value better.
Signs of the emerging strains on consumers were also evident in the retailers’ results. Shoppers were visiting more often but buying less, Mr. Vasos of Dollar General said, describing buying choices as hewing “closer to need” than less essential, discretionary purchases. At Dollar Tree, there has been a “huge shift from cash into credit, which tells us the customer is pressured,” Mr. Witynski said.
These pressures will loom over the retailers in the coming months. Dollar Tree lowered its forecast for profit this year, in large part because it is planning to cut its prices to bolster its competitiveness, as other retailers — like Target and Walmart — mark down their inventory to shed goods that they are struggling to sell.
Dollar Tree’s share price fell more than 10 percent on Thursday. And although Dollar General upgraded its forecasts for sales and profit, investors showed nervousness about the outlook for consumers and pushed its stock down less than 1 percent. Still, the shares of both chains have outperformed the market this year, posting small gains while the S&P 500 has fallen by more than 10 percent.
Instead of abandoning retailers like Walmart, which recently reported a 6.5 percent increase in sales, shoppers would often make weekly visits to Walmart to stock up on essentials and then buy miscellaneous items at the dollar stores to cut costs, Mr. Feldman said.
Retailers have struggled with excess inventories as shoppers cut back on their spending. Macy’s inventory increased 7 percent from one year earlier, the company reported this week. Last week, Kohl’s said its inventory was up 48 percent, and Target said its inventory was 36 percent higher.
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Economists have been surprised by recent strength in the labor market, as the Federal Reserve tries to engineer a slowdown and tame inflation.
At Dollar Tree, inventory rose about 50 percent to $5.4 billion in the quarter, from $3.6 billion the year before. Inventory at Dollar General was up 25 percent to $6.9 billion compared with $5.3 billion one year earlier, which the company attributed to inflation as well as more valuable products.
“We were well ahead of any inventory issues that may pop up unlike some of our competitors out there,” Mr. Vasos said. “We canceled orders as early as December because we saw where the customer was headed.”
Dollar Tree, whose shares are up about 18 percent since the beginning of the year and is one of the best-performing stocks in the consumer discretionary sector of the S&P 500, reported a 6.7 percent increase in sales, to $6.77 billion from $6.34 billion in the same period last year. At Dollar General, sales rose 9 percent, to $9.4 billion from $8.7 billion in the second quarter of last year, which the company said was a result of positive performance in new and existing stores and customers spending more per visit.
Dollar Tree said profit increased 27 percent, to $359.9 million from $282.4 million a year earlier. Dollar General’s profit rose 6.4 percent, to $678 million, compared with $637 million a year before.
“Our second-quarter performance reinforces the relevance of our brands for millions of households pressured by higher costs for food, fuel, rent and more,” Mr. Witynski said in a news release.
Dollar General also announced it was promoting John Garratt, its chief financial officer, who would retain his current responsibilities in addition to serving as Dollar General’s president.
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