Dollar stores bringing in higher-income consumers as prices rise

In This Article:

Dollar Tree (DLTR) and Dollar General (DG) have become a tale of two discount retailers. While Dollar Tree — which also owns Family Dollar — announces plans to close 1,000 stores over the next several years, Dollar General forecasts plans to open just as many new locations.

Goldman Sachs Managing Director Kate McShane explains where inflation is pressuring consumers of different income levels as they opt to shop at discount retail chains.

"When people talk about 'normalized' [promotional environment], they talk about levels going back to what we saw before the pandemic. I think during the pandemic and post-the pandemic, there was quite a bit of pullback in promotions just because there was such high demand," McShane says. "Now that we're in a more normalized environment, the level of promotions that we're going to see across retail will look similar to what we saw before the pandemic."

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Editor's note: This article was written by Luke Carberry Mogan.

Video Transcript

SEANA SMITH: Shares of discount retailers Dollar Tree and Dollar General under pressure this week after the companies issued troubling guidance in their latest quarterly results. First, Dollar Tree on Wednesday announcing it would close nearly a thousand Family Dollar stores over the next few years as it battles macroeconomic concerns and theft. Now, on the other hand, you have Dollar General on Thursday, which also warned of higher costs related to more costly labor and shrink.

So what does all this mean for the playbook and how do these companies turn things around? We want to bring Kate McShane. She's Goldman Sachs' managing director covering the US retail sector.

Kate, it's great to have you here. So help us make sense of the trends that we're seeing at Dollar Tree and Dollar General because I think many investors would think that these two names would be positioned to do extremely well at a time like this. So why are we seeing a bit of a disappointment when it comes to the forecast?

KATE MCSHANE: Well, I think we might have to start just what we've seen so far, which has been a more challenged top line and revenue growth for both retailers as they have experienced more pressure from the lower-end consumer, which is their core customer. And so because of that, there has been pressure on the top line for them. The lower-end consumer, while employed, has been dealing with high inflation and also reduced government benefits. And that has been one of the areas that both discount retailers have been dealing with along with on the cost side quite a bit of shrink, which is basically loss of product from stealing and the like at the stores.