Government Food Benefit Cuts Could Be Bigger Headwind For Dollar General Than Dollar Tree

While discussing the faster rate of decline in government food benefits in June, Buckingham Research said it believes Dollar Tree, Inc. DLTR may be less impacted than Dollar General Corp. DG. The firm estimates a 10–20 basis point hit for the former, compared to the 20–40 point-impact for the latter, given its estimate for SNAP penetration and exposure to states with the largest change in SNAP dollars.

SNAP is the acronym for the Supplemental Nutritional Assistance Program, which provides assistance to low- and no-income people living in the United States to purchase food.

Eligible Numbers Shrink

Analyst John Zolidis noted that SNAP dollars declined 5.6 percent year-over-year in June, faster than the 5.2 percent drop in May, reflecting changes to eligibility requirements. The eligibility requirements, according to the analyst, limited the number of months a recipient can collect SNAP. Higher employment and wage growth also would also reduce SNAP, the analyst noted.

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SNAP Boost

According to the firm's estimate, SNAP penetration reached an estimated 4–5 percent of sales of these chains in recent years. However, given that customer has to redeem the free money at a store, the firm believes the total impact to the chains is 1.5 to 2 times of the amount of SNAP going through the register. Accordingly, the firm estimates SNAP influences 7–8 percent of the total revenues.

Impacted At Varying Degrees

• Seven states, where SNAP distribution reduced by over 10 percent, accounted for 25 percent of Dollar General's store base versus 19 percent for Dollar Tree.
• States with reduction of over 5 percent accounted for 60 percent of Dollar General's store base compared to 53 percent for Dollar Tree.

Geopolitical Influence

The firm attributed the slower sales at many consumer companies to the political uncertainty, which it expects to persist through the U.S. presidential election. The firm also believes media coverage of domestic social unrest and terrorism abroad also impacted sales.

Apart from government shutdowns and other events that historically hurt sales, the firm believes acrimonious political debate, riots in Milwaukee and Charlotte, shootings in Dallas and Orlando and bombs in the street in the New York City will also weigh on the issue.

Although Buckingham Research remains bullish on the long term for these businesses, given the favorable macroeconomic fundamentals, it expects sales to remain sluggish at least until the election. Subsequently, the firm believes there may be release of some pent-up demand.

At time of writing, shares of Dollar General were down 0.54 percent at $71.72 and those of Dollar Tree were down 0.21 percent at $79.92.

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