Dollar stores struggle despite value-conscious consumers

Dollar Tree (DLTR) has disclosed it is exploring a potential sale or spin-off of Family Dollar as the company struggles with weak consumer demand. Forrester Research Retail Analyst Sucharita Kodali joins Wealth! to discuss the state of the consumer as inflationary pressures continue to pose a challenge.

"The consumer has been feeling really down about the economy for a long time, pretty much since inflation has been prevalent ... But the irony is that retail spending is at a record high, and consumers for a long time were spending at the level of inflation and then some," Kodali explains. She adds that recent data has shown retail spending cooling, which could indicate that "the consumer is finally probably at their saturation point with respect to spending on some of these discretionary goods in particular."

Kodali notes that Walmart (WMT) and warehouse clubs are performing well due to a value-conscious trend among consumers. However, Dollar Tree is falling behind as the dollar channel is "incredibly saturated." She adds that the chain's stores need renovations and maybe even location changes to perform better. The company may not be willing to make these investments, she explains, which is why it is exploring a potential sale.

For more expert insight and the latest market action, click here to watch this full episode of Wealth!

This post was written by Melanie Riehl

Video transcript

We're getting a fresh read on the cautious consumer discount.

Retailer dollar tree disclosed it's exploring a potential sale or spin off of family dollar as the company struggles to counter weaker demand amid inflation.

But no matter how many deals discounts or savings initiatives, retailers roll out sometimes it seems like they can't do anything to change shoppers perceptions on prices.

At least that's what our next guest says for more on the consumer and their spending habits.

I'm joined by Sucharita Kalli, who is the Forester research retail analyst Citta.

Great to see you here with us today first.

I mean, take us into your thesis right now about where the consumer sits.

I mean, it, it was amazing to hear from the AD P chief economist just minutes ago saying that this is a battle weary consumer.

What do you make of them and how um how would you define this consumer?

Yeah, we've had this expression, the vibe session going on for a while where um the consumer has been feeling really down about the economy for a long time pretty much um since inflation has been prevalent, uh the consumer just hasn't felt good about it.

Um there's also a political overtone as well that um pretty much dates back almost 10 years at this point where whoever does not have their party in the White House, they tend to be very down on the economy.

So in any economy, you're going to have 50% of people just unhappy with the current situation.

So there is that, but the irony is that retail spending is at a record high and consumers for a long time were spending at the level of inflation.

And then some only in recent months with some of the census census data on monthly retail spend has some of that uh spending not exceeded the level of inflation.

So we're seeing that the consumer is finally probably at their saturation point with respect to spending on some of these discretionary goods in particular and even with spending at a record high, as you noted a moment ago, it seems like the consumer is being extremely value conscious about where they're spending, which brands are winning out or which retailers are winning out as that decision making process is being enacted.

Well, certainly Walmart, um and that is a company that tends to do very well in any economy, but certainly in any in one where they, the consumer confidence is particularly low.

Um You see even warehouse clubs doing well and that's another element of this economy which is, it's almost, it's K it has a K type of recovery.

K shaped recovery um in which there are the affluent consumers who are doing well.

And even though those consumers, like everybody are looking for value, they tend to, to, to really gravitate toward those warehouse clubs.

Um So warehouse clubs are doing pretty well in this economy.

You have a lot of ecommerce players like Amazon, some of the Chinese upstarts like Tu that seem to be doing particularly well right now.

So those are some of the winners.

You would think the Dollar Channel would be doing well in this kind of an economy.

And probably when you look at certain store profiles, they probably are.

Uh but at the same time, the dollar channel is incredibly saturated, there are more dollar stores in the United States than just about any format.

And you also have a lot of the dated dated stores that are part of that family Dollar chain, Dollar Tree, of course, acquired that could be part of the reason that people are going to Walmart instead.

Walmart has just spent a ton of money renovating a lot of its stores.

So it's just a more pleasant store environment that also delivers value.

That's really interesting, you know, especially as we're hearing about some of the spin off intentions that Dollar Tree is talking about with family dollar, which underneath of it, the same store sales.

I mean, a fraction of what we had seen in terms of the rise year over year for this most recent quarter.

What do you make of that strategy?

Especially as they've already been closing many of the unprofitable or under performing family dollar stores and kind of pivoting dollar tree in, in certain elements to getting back towards um these prime locations where it is more focused around selling for a dollar and where they can ultimately kind of retain consumer mind share there.

Yeah.

Well, typically, um, stores sales are heavily dependent on whether or not, of course, people want to shop there and every few years, whether it's a decade, sometimes even longer stores need to be renovated because if they are not, um they get very tired, they get dirty.

It's um there, there will be things that literally haven't been touched in that period of time that need to be cleared and uh when a store does not make those changes or it's too expensive to make those changes, which it may not because you have to remember.

Um The Family Dollar Chain has been around since the sixties.

So a lot of those locations may just not be great locations anymore retail locations.

Um Cha the the success of retail locations changes, geographic centers change as neighborhood are developed.

Um The uh the Dollar Tree at the Dollar Tree brand is, is much newer and um they likely are seeing better comps as a result of just having some of those better locations.

So, so certainly the renovation piece is a big part.

Of it and it sounds like they just don't want to invest right now in some of that renovation.

And that's, that's part of the reason that they're looking to divest.

But the question then is like, well, where are you going to make, make up the difference?

Well, they did purchase um about half of the 99 cent store chain with what's left of it there.

And that could be an interesting one because 99 cent store is actually has a pretty cult following.

Um It exists to support essentially food deserts in a lot of the southern California and uh south southwester part of the United States.

So, um that could be some the ways that they, they look to to have a, a different strategy situated just lastly while we have you here, we got a company that's gonna be reporting earnings later on today in Lululemon.

That could be a barometer of to what extent high income is perhaps continuing to spend or middle income might be trading down into uh an Athleta if you will even, what are you gonna be looking out for there?

Well, Lulu's been doing pretty well, they've been growing double digits.

So I'd be surprised if we didn't see similar numbers today.

They have been one of the retailers that's absolutely been gaining share while the apparel industry overall has struggled.

Um And certainly even with, with, in comparison to other athletic apparel um merchants and brands like Nike Adidas under Armour Lulu's definitely been outperforming them.

So, um so, so, but if we do see anything soft, I do think that it suggests it could be a harbinger of uh consumer sentiment finally, um you know, kind of bringing down those inflation numbers probably finally to the level that the fed would like um in, in the coming months, Sua always a pleasure to get some of your insights and analysis.

Such Rita Kalli, who is the Forester Research retail analyst.

Great to see you.