Walmart Gains And Dollar Tree Adapts While Dollar General Faces Challenges: KeyBanc Analysis

KeyBanc analyst Bradley B. Thomas examined customer shopping behavior and loyalty shifts within two dollar stores — Dollar Tree Inc DLTR and Dollar General Corp DG.

DLTR (Sector Weight rating) management has made many changes that should yield positive results, he explains. But there's risk from increasing competition and price investments within the sector, particularly given the market share gains by Walmart Inc WMT.

DG (Sector Weight rating) may respond with additional efforts to improve traffic, he added.

Discount customers will begin to lose tailwinds from gas prices in the months ahead.

Over Weight rated Walmart is best positioned in the near term and sees long-term growth opportunities in the sector despite mixed near-term dynamics.

DLTR investments in Family Dollar (FD) are currently driving much better performance. 

In measuring loyalty and share of wallet, the analysis suggests after multiple years of losing loyal customer share, FD loyalty numbers have stabilized. After closing the pricing gap with competitors, FD customers spend slightly more with the banner than before the price investments.

Also, DT and FD appear to gain traffic share every quarter within the Discount & Dollar Store category. 

The data also points to potential competitive investments from Dollar General, given the strength seen at Family Dollar. 

Following Walmart earnings last week, the chain will likely take share across nearly all categories. The retail giant continues to gain share across all income demographics while the number of categories in which the company takes share has expanded.

During the second quarter, Walmart's grocery comps developed in the HSD range, which compares to +1.9% for the industry.

Additionally, Walmart noted sequential improvement in general merchandise trends, which compares favorably to Target Corp TGT, and its e-commerce trends point to share gains.

Ultimately, for the second half, Walmart gains can continue to pressure nearly all other retailers and raise the risk that other retailers will need to invest in price and labor in the future.

Price Actions: DG shares traded lower by 1.79% at $159.35 on the last check Tuesday. DLTR shares traded lower by 0.65% at $140.86.