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Dollar General Outperformed Dollar Tree in Q1 amid COVID-19

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Dollar General (NYSE:DG) and Dollar Tree (NASDAQ:DLTR) beat Wall Street’s estimates for the first quarter of fiscal 2020. The companies benefited from a strong spike in demand for essentials amid the COVID-19 pandemic. However, Dollar General continued to outperform Dollar Tree even amid the pandemic.

Dollar Tree stock rose 11.5% on May 28. Investors were happy with the Family Dollar stores’ performance. Despite the strong results, Dollar General stock fell 1.6% on Thursday. Dollar General’s investors might not have expected the company to withdraw its fiscal guidance after its stellar first-quarter results. Notably, Dollar Tree stock has risen 3.8% YTD (year-to-date), while Dollar General stock has risen 18%.

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Dollar General and Dollar Tree’s Q1 sales

Dollar General’s first-quarter sales grew 27.6% YoY (year-over-year) to $8.45 billion. Analysts expected sales of $7.61 billion. Meanwhile, the company’s same-store sales grew 21.7%. The company experienced growth across consumables, seasonal, home products, and apparel categories. The home products category delivered higher same-store sales growth compared to the other categories.

Dollar Tree’s first-quarter sales rose 8.2% YoY to $6.29 billion, which beat analysts’ forecast of $6.14 billion. Dollar Tree’s same-store sales grew 7.0%. The Family Dollar brand’s same-store sales rose by 15.5%. The brand benefited from strong demand for consumables. Customers stocked up on basic goods in March amid the COVID-19 outbreak. Walmart (NYSE:WMT) and Kroger also benefited from stockpiling. The Family Dollar stores experienced higher sales in the home and other discretionary categories.

Meanwhile, Dollar Tree’s same-store sales fell 0.9% YoY. The COVID-19 outbreak caused a decline in the demand for seasonal and discretionary products. Party, candy, and Easter merchandise experienced lower sales.

Earnings amid COVID-19

Dollar General’s first-quarter EPS grew about 73% YoY to $2.56. The EPS was significantly higher than analysts’ forecast of $1.74. Strong top-line growth and improved margins drove the company’s earnings. Dollar General’s gross margin expanded by about 50 basis points YoY to 30.7% due to a lower markdown rate and higher markups on inventory purchases. Likewise, the operating margin expanded to 10.26% in the first quarter of fiscal 2020 compared to 7.73% in the first quarter of 2019. The operating margin improved due to leverage on certain operating costs due to strong sales. The costs included occupancy costs, utilities, retail labor, and others.

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Dollar Tree’s first-quarter adjusted EPS declined by 8.8% YoY to $1.04 but beat analysts’ forecast of $0.85. Higher COVID-19 related costs, including wage premiums, had a negative impact on the bottom line. Dollar Tree’s gross margin decreased by about 120 basis points to 28.5% in the first quarter. Higher sales of lower-margin products, markdowns related to Easter merchandise, incremental tariffs, and higher distribution center payroll costs impacted the gross margin. Also, the company’s operating margin contracted by about 80 basis points to 5.8%. The incremental costs related to COVID-19 dragged down the operating margin.

Will sales continue to be strong?

Dollar General continues to experience higher demand in its stores even in the fiscal second quarter. However, the company cautioned that it has seen some moderation in recent days and increased variability in demand. From the beginning of the second quarter through May 26, the same-store sales rose by about 22%. Dollar General expects to beat its previously issued fiscal 2020 guidance. However, uncertainty related to the COVID-19 crisis makes it difficult to predict the upside. As a result, the company withdrew its previously issued fiscal 2020 guidance.

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Dollar General might resume its share repurchase program in the second quarter. The company temporarily suspended share repurchases in the first quarter due to uncertainty amid COVID-19. Meanwhile, Dollar General plans to open 1,000 new stores, remodel 1,500 mature stores, and relocate 80 stores in fiscal 2020. In the first quarter, the company opened 250 locations, remodeled 481 stores, and relocated 17.

Dollar Tree withdrew its guidance in March due to uncertainty amid the pandemic. The company temporarily suspended any share repurchases. Now, the company plans to open 325 new Dollar Tree stores and 175 new Family Dollar stores. In the first quarter, Dollar Tree opened 99 new locations and expanded or relocated 21 stores. The company also closed 14 stores and renovated 220 stores to the Family Dollar H2 format. Dollar Tree expects to complete 750 Family Dollar H2 renovations in fiscal 2020 compared to the previous plan of 1,250 renovations.

The company has seen continued sales momentum in Family Dollar stores in the second quarter. The stores have seen an improvement in discretionary categories. Meanwhile, sales in the discretionary category have been improving at the Dollar Tree brand stores.

Overall, discount stores might continue to benefit. Customers might prefer to shop at budget-friendly stores amid challenging times.

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