Every economic environment creates its own set of winners and losers. Within the retail sector, the recent surge in inflation led to rare earnings misses from big-box retailers like Walmart (NYSE: WMT), Target (NYSE: TGT), and Costco (NYSE: COST).
These companies were hit hard by a variety of factors such as excess inventories and a drop in demand for high-margin items, while demand increased for lower-margin groceries and gas. Further, these companies so far have chosen not to pass on price increases to customers in a significant way.
While the big-box retailers are a loser in this environment, one of the big winners in the retail sector is the dollar stores. Across the board, they topped earnings estimates and increased their guidance.
These companies are experiencing organic growth as evidenced by nearly double-digit rates of same-store sales growth in addition to adding new locations. It's also a validation of these companies' recent strategy to add more groceries to their shelves including items like milk and frozen foods.
Inflation is resulting in customers becoming more price and value-conscious which is leading to increased foot traffic for these stores and more grocery sales. This is also happening in big-box retailers. However, grocery sales don't negatively impact margins for dollar-store retailers in the same way that they do for big-box retailers.
We can see the success of the concept through these companies' aggressive expansion plans. Dollar General (NYSE: DG) plans to add 1,100 new locations over the next year, adding to its current total of 18,000. Many of the new locations will be larger locations with more aisles for higher-margin items like health or beauty products.
Dollar Tree (NYSE: DLTR) is planning to open 590 stores this year, adding to its total of 15,000. It's slightly increasing prices on some products to $1.25 and $1.50 and also adding more products in the $3 to $5 range.
Like the big big-box retailers, it's facing a delicate balance of winning market share and raising prices to offset higher costs. So far, the dollar stores seem to be threading the needle well as they topped earnings expectations by a healthy amount and raised guidance for the full year.