Consumers wallets are strapped, and that's good news for America's discount retailers.
A combination of student loan repayments, reduction of SNAP benefits, and "drag from tax refunds," could stir up a $10 billion headwind against consumer spending in 2024, according to a JPMorgan analysis led by analyst Matthew Boss.
Though there is some tailwind from lower gas prices, Americans under age 62 — who won't benefit from an inflation-adjusted Social Security payment — could be feeling the squeeze. The child tax credit expansion, which the House is expected to look at this week, could provide some relief for households making under $200,000 per year.
But two stocks could have the potential to outperform in this sort of macro environment — Dollar Tree (DLTR) and Five Below (FIVE).
Shares of Dollar Tree jumped 3% on Monday after JPMorgan upgraded the stock to overweight. Boss noted its limited exposure to the Red Sea shipping route, and a higher-than-average mix of discretionary products compared to rivals Dollar General (DG) and Ollie's Bargain Outlet Holdings (OLLI).
The chain is a "dual deflation beneficiary," wrote Boss. As inflation on necessities slows down, consumers may spend more on discretionary goods, which make up 51% of Dollar Tree's products. Since the company sells at a fixed price of $1.25 on many products, it also stands to gain as the cost of goods drops.
"CEO Dreiling cited dis-inflation [deflation] as a potential merchandising multi-year opportunity," Boss wrote in client note. The current environment could allow for "product reinvestment" in quality and pack size as well as the return of recently discontinued items due to inflationary pressures.
Planned closures of roughly 600 underperforming Family Dollar stores could also lift Dollar Tree's bottom lines and same-store sales growth, per Boss.
In its latest quarterly report, the Dollar Tree brand saw same-store sales jump 5.4%. The company also updated its net sales expectations for the full fiscal year 2023 to between $30.5 billion and $30.7 billion.
Rick Dreiling, chairman and CEO, acknowledged the recent market share gain in a call with investors.
"In a challenging retail environment where the accumulating pressures of inflation, reduced government benefits, and depleted savings have negatively affected lower-income consumers, our top line performance outpaced most of our peers," Dreiling said, noting that both its Dollar Tree and Family Dollar segments reported higher foot traffic and unit volume.
Now could also be a good "buying opportunity" for shares of Five Below, which maintained its Overweight rating from JPMorgan.
The company has locked in its shipping rate for 2024 and the beginning of 2025, mitigating its risk from disruptions in the Red Sea, wrote Boss.
Similarly, deflation could boost same-store sales growth and give the retailer to reinvest in the quality and quantity of products, which was hard to do during the inflationary environment of the past two years.
"[The] customer will likely notice improved products at same price points," wrote Boss.
CEO of Five Below, Joel Anderson, said the team is "seeing more transactions" in a call with investors at the end of last year, adding: "We would expect that to continue the better part into next year" as consumers are "very discerning on what they're buying" with more trips to the store.
Time will tell if this is the turn of a tide. Both Five Below and Dollar Tree, in addition to its peers like Dollar General, have been under pressure in the past year, as many believed low-income consumers would pull back even more on spending.
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Brooke DiPalma is a senior reporter for Yahoo Finance. Follow her on Twitter at @BrookeDiPalma or email her at bdipalma@yahoofinance.com.
