BofA Sees Pressures Ahead For Dollar Stores

Dollar General Corp GD and Dollar Tree, Inc. DLTR shares were trading lower Thursday after BofA downgraded the companies ahead of their scheduled fourth-quarter earnings in March.

Dollar General and Dollar Tree stores have seen sales soar over the course of the pandemic as out-of-work shoppers have looked for cost savings and customers have consolidated shopping trips, preferring to stay close to home.

BofA analyst Robert Ohmes sees this changing as the economy reopens and customers alter their shopping behaviours.

Dollar General, Dollar Tree Position As The Economy Reopens: During the pandemic Ohmes believes Dollar General and Dollar Tree benefited from customers who have preferred to stay close to home to shop for necessities.

Comparing these companies to Walmart Inc WMT, Ohmes believes Dollar General and Dollar Tree may not recover as well. “We believe WMT could see a faster traffic recovery due to continued Digital growth, strong general merchandise momentum, and recovery of traffic lost to higher priced, more conveniently located grocers,” he said in a note.

“We also believe continued strip mall store closures, accelerated e-commerce penetration and new pandemic-driven warehouse club member’s 'stickiness' could all pressure the return of a thriving impulse shopping environment,” he said.

Dollar General, Dollar Tree And Rising Minimum Wage: Ohmes believes the Dollar Tree and Dollar General will struggle under Biden’s initiative to raise the minimum wage to $15 an hour, which “would dramatically increase labor costs for DG (& DLTR) more than most other retailers,” the analyst said.

“We believe most dollar store associates start at/near state minimum wages,” Ohmes said.

Compared to the revenue growth of companies such as Amazon.com Inc AMZN, Target Corporation TGT, and Costco Wholesale Corporation COST, which are already paying their employees minimum wage, a rise to $15 an hour “could increasingly pressure DG’s (and DLTR’s) wage structures,” he said.

BofA does see some positive potential for Dollar General because of profit-driving initiatives, including cooler door expansion; growth of its private-label product line, including roll out of its Fresh line; FedEx pickup and drop-off for 8,500 stores and plans to open 1,050 new stores in 2021.

“We believe produce (currently in 1,000+ stores, 600 more in 2021) and new popshelf store formats (30 stores by F21) represent an opportunity to grow the size of DG’s addressable market and become a 'fuller' shop," he noted.

Ratings, Price Targets:

BofA downgraded Dollar General from Buy to Neutral and decreased its price target from $245 to $215.

BofA downgraded Dollar Tree from Buy to Underperform and decreased its price target from $123 to $95.

(Photo: Dollar General)