Dollar stores are offering a different type of bargain these days: their stocks. Discount retailers like Dollar General, Dollar Tree, and Big Lots have experienced sharp drops in their stock prices, as consumers feel the pinch of inflation.
While the entire retail sector has shown weak growth this year, dollar stores have been in near-freefall. Dollar Tree lost a quarter of its share price since the start of the year, closing at $106.35 yesterday. Dollar General fell by more than half, closing at $105.80. Big Lots had the worst performance: The Columbus-based discounter lost over two-thirds of its share price, falling from over $14.86 to under $5.
In the same time period, the S&P 500 rose more than 11%.
The decline is spurred by unexpectedly poor earnings, resulting from an unfavorable mix of high inflation and reduced pandemic benefits that cut the buying power of low-income consumers. While analysts remain mostly optimistic about the long-term outlook for discount retail, market forecasts remain gloomy for the near term.
“When you talk about the low-income consumer, inflation has probably increased more than wage growth,” explained Brian Yarbrough, a researcher with Edward Jones. “Near term, it probably remains pretty choppy for that consumer.”
While inflation has fallen from its 9% pandemic high, prices are still rising too fast for the Federal Reserve’s comfort, as the recent CPI report showed. Moreover, the termination of pandemic SNAP benefits in March cut food stamp income for the poorest recipients by an average of $90 each month.
Another culprit is the increase in “shrink”–an industry euphemism for inventory loss, including due to theft. In their earnings call last month, executives at Dollar Tree—which also owns Family Dollar—attributed their falling margins to “unfavorable shrink trends.” Dollar General CFO Kelly Dilts predicted an “extra $100 million in additional shrink headwind.”
Discounters are not the only stores affected by reduced consumption. Target, Home Depot, and Walmart have all cited unexpected inventory losses in their recent earnings reports, and Dick’s Sporting Goods shares crashed after the company cut earnings expectations due to “unacceptable amounts of retail theft.”
Stock prices for discount retailers dropped over the course of the year, while the S&P 500 gained double digits.
Via Yahoo Finance
According to the National Retail Federation, theft and organized crime cost stores $100 billion in 2021.
While the shares are going for a song, institutional traders are still hesitant to buy.
“I don’t see any reasons to consider it on the long side,” said Yurii Kitikari, a portfolio manager at the proprietary trading firm Wealth Mill. Kitikari might buy or sell the same stock five times in a single year, but for now he’s keeping consumer retail at arm’s length.
“Can they correct 15, 20%? Yes,” Kitikari said, adding: “I see many more, better opportunities at the moment.”
Analysts say that there’s still upside to these bargain brands. Goldman Sachs maintained its “buy” rating on Dollar General, although reducing its price target for the shares. Raymond James, a financial holding company, downgraded the stock but still expects it to outperform.
“[T]he cost pressures hindering earnings will eventually abate and the company will return to more consistent earnings growth,” wrote analyst Bobby Griffin in a research note. “In our view, the company is focusing on the right retail strategic investments.”
For smaller companies, like Big Lots, continued price falls could trigger a cascade of sell-offs from institutional holders, according to Robert Netzly, CEO of Inspire Investing. His company—with $2.3 billion under management—creates index funds based on religious values as well as market opportunities.
“Many funds like ours have rules-based requirements for inclusion or exclusion from those indexes,” Netzly explained. “They (companies) could be at risk for removal from those indexes, which could result in large outflows.”
There are other factors that could weigh down on these companies. Dollar Tree and Family Dollar have been hit with sizeable penalties for workplace hazards, and Dollar General is considered a “severe violator” by the Department of Labor. Further enforcement actions could complicate the companies’ recovery even after current problems subside.