Dollar stores enabling consumer 'needs over wants' as prices rise

As inflation continues to be a burden on the consumer, from increasing wholesale prices and rising oil prices (BZ=F, CL=F), discount retailers like Dollar General (DG) and Dollar Tree (DLTR) stand to benefit the most from consumers trading down on goods. While Dollar Tree looks to close stores, Dollar General plans to open just as many locations. Can these discount stores continue to take advantage of the consumer environment?

Jefferies Vice President of Equity Research Corey Tarlowe and Zacks Investment Management Client Portfolio Manager Brian Mulberry join Yahoo Finance to discuss the strength of the consumer amidst rising prices and whether discount stores can truly stand to take advantage of the economic backdrop for consumers.

"One of things you monitor and think about when it comes to dollar stores is especially when it crosses that $4 a gallon threshold, you do tend to see traffic pick up at the dollar stores. So as you have seen really robust inflation cooling some, but still sticky, potentially oil prices going up, it does spell for a consumer that is still very value-conscious," Tarlowe says on consumer pressures. "We are starting to see some early signs of improvement in general merchandise at certain retailers, but it's still very, very early days there, so you're still seeing a prioritization of needs over wants."

Mulberry elaborates on which consumers truly feel the pressure and how Dollar General is capitalizing on this:

"Where we find a clear dividing line for the consumer is whether or not you own your own home. Those people that owned a home and were able to refinance at a low fixed rate aren't feeling the pinch of inflation as much as those people who have been renting since 2020. They are feeling everything, rents are up 12-20% nationwide, now we've have energy costs rising on the back of insurance costs rising. And that's really causing a change in the behavior of consumers, where they're having to go and save money somewhere else. "

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Nicholas Jacobino

Video Transcript

- Well, maybe, Corey, I'll start with you. You've gone through a lot of earnings reports now, Corey. You've listened to a lot of conference calls. What's your take on the kind of low-income consumer right now, Corey? How healthy and resilient do they look just based on what you're hearing from your own coverage universe?

COREY TARLOWE: Good afternoon. And thanks for having me. So what I would say is that right now, the low-income consumers clearly been pressured by the persistent inflation that we've seen. And the individual who was on before me cited that oil could be breaking higher.

Well, one of the things that you monitor and you think about when it comes to dollar stores is especially when it crosses that $4 a gallon threshold, you do tend to see traffic pick up at the dollar stores. And so as you have seen really robust inflation cooling some but still sticky. Potentially oil prices going up. It does spell for a consumer that is still very value conscious we are starting to see some early signs of improvement in general merchandise at certain retailers. But it's still very, very early days there. So you're still seeing a prioritization of needs over wants.

- Brian, I want to get your take on this as well. And whether-- you know, it feels like when you're talking about Dollar General, Dollar Tree, Family Dollar, the trade down sort of stops there, right? So it would just be people not buying as many discretionary items or buying less of what they are buying. Kind of where are we in that cycle in your view?

BRIAN MULBERRY: Yeah, absolutely. And I'll add to the discussion where we find a clear dividing line for the consumer is whether or not you own your own home. Those people that own a home and were able to refinance at a very low fixed rate aren't feeling the pinch of inflation as much as those people who have been renting since 2020.

They're feeling everything. Rents are up 12% to 20% nationwide. Now we've got energy costs rising on the back of insurance costs rising. And that's really causing a change in the behavior from consumers where they're having to go and save money somewhere else.

And so we're looking at these stores and their product offering. And Dollar General, in particular, is one of those places that has really made a key investment in perishables where you can actually get some fresh produce while you're there shopping for other items at a discount as well. And so that's really a big part of their growth is to have more engagement for people who are already there trying to save money in their budget because of the higher cost of everything right now.

- And, Corey, I want to bring you here as well because you cover those names. And it was interesting, Corey, to watch Dollar General reports gives an outlook. Investors clearly liked it. Dollar Tree reports and tanks. You know, Brian touched on it. But I want your take, Corey, as well. What do you think kind of explains the diverging stories there?

COREY TARLOWE: Yeah, it's a tale of two businesses. I think at Dollar Tree, it's certainly a tale of two banners as well. For me, at Dollar General, it's all about traffic and market share gains. Dollar General has seen traffic increase in the last two quarters consecutively. They've seen market share gains in consumables, in both units and dollars and market share gains in dollars in non-consumables.

So everything seems to be trending in a good direction there from a sales perspective. And then as we go to Dollar Tree, as I mentioned, it's a tale of two banners. The Dollar Tree banner continues to be very, very strong from a sales and margin standpoint.

However, if you look at the Family Dollar banner, the Family Dollar banner has been very pressured from a profitability standpoint. And in fact, in the last quarter, it only generated $7 million of operating profit on a business that is multi-billion dollars in revenue. So that profit outlook for Family Dollar does give us pause when it comes to Dollar Tree.