Dollar Stores Shine in Retail Tumult

American shoppers haven't entirely given up on retail.

On Thursday, Dollar General Corp. and Dollar Tree Inc. both reported sales growth and higher traffic. And executives from the companies said they plan to expand their selection of discretionary products -- those shoppers want but don't need -- like seasonal party decorations, home goods and beauty products.

Shoppers are "back to work for the most part," said Dollar General CEO Todd Vasos on Thursday, "Probably feeling a little more confident and spending a little bit more on her non-consumables," like seasonal merchandise and home goods.

The strategy is a sign that they are confident their core low-income consumers will continue to have extra spending power in the foreseeable future and will use it in their locations. Their customers typically come from households earning about $40,000 per year.

Dollar stores have been a bright spot almost continuously since the recession, with the two largest chains adding thousands of stores.

Their results this quarter contrasts with those from traditional apparel retailers like Gap Inc. and L Brands Inc. and department stores including Macy's Inc. and Nordstrom Inc. which disappointed investors.

"We are part of what I consider, in this economic environment, the most attractive sector in retail," said Bob Sasser, chief executive of Dollar Tree, the second-largest dollar store chain after Dollar General.

Compared with big-box competitors like Wal-Mart Stores Inc., dollar stores are smaller and located in neighborhoods closer to homes. They sell a combination of basic staples, like rice and beans and toilet paper, along with "treasure hunt" products like party decorations or children's toys, often in smaller package sizes with low prices. Big consumer products companies have worked to create more products that can be sold within the fast growing format.

Other discount chains including TJX Cos. and Wal-Mart Stores Inc. fared similarly well this quarter. Also on Thursday, Burlington Stores Inc., which specializes in discounted branded apparel and home goods, reported sales growth of 4.3% in stores open at least a year for the quarter ending April 30.

Shares of Dollar Tree rose 13% on Thursday to $88.52, while Dollar General's stock rose 4.8% to $88.11.

The April sales slowdown described by several retailers in recent weeks due to the early Easter holiday and rainy spring weather didn't shake sales from the dollar stores.

"While there is always weather and different phenomenons that happen, we capitalize on whatever those phenomenons are," said Mr. Vasos from Dollar General. "And we felt that we did a pretty good job."

Same-store sales at Dollar General rose 2.2%, helped by increases in both customer traffic and average transaction amount. Profit rose to $295.1 million from $253.2 million, while sales increased 7% to $5.27 billion.

Dollar General is focusing on expanding its selection of perishable food, health and beauty care and party and stationery supplies, as it plans to grow from almost 13,000 locations to 20,000 stores by 2020, said executives on a call with investors to discuss earnings.

Dollar Tree, meanwhile, is expanding its frozen and refrigerated selection by installing freezers and coolers in 400 more stores in 2016. Perishable food brings shoppers to stores more frequently. It is also adding new stores and building its 11th new distribution center to support its growth.

Dollar Tree reported a profit of $232.7 million, up from $69.5 million, thanks to the acquisition of Family Dollar, its smaller competitor, last year. Revenue rose to $5.09 billion from $2.18 billion. Same-store sales rose 2.2% excluding foreign exchange changes.

For 2016, Dollar Tree increased its financial forecast and now expects earnings per share of $3.58 to $3.80, up from $3.35 to $3.65.

Anne Steele contributed to this article.

Write to Sarah Nassauer at [e-mail]

(END) Dow Jones Newswires

May 26, 2016 15:35 ET (19:35 GMT)

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