2 discount retailers who thrive in bad times

A slowdown is underway as the erratic behavior of the Trump Administration leads businesses and consumers to hold off on purchases and wait and see.

Last week’s blanket tariff announcements may tip the global economy into recession or worse. That will become clearer in the next six months.

In the meantime, some insights from bell weather companies: Canadian Tire (TSX: CTC) has seen a noticeable drop in products people would like to buy, but aren’t essential, things like sporting goods, camping equipment and home improvement items. Loblaw’s (TSX:L) and Metro (TSX:MRU) have seen a shift to their discount banners with smaller average purchases per visit. McDonald’s (NYSE:MCD) sales fell in the US in its latest quarter as lower income consumers eat there less often and spend less per visit. Visa (NYSE: VIS) is seeing fewer big-ticket purchases and fewer travel plans.

There are companies who benefit in this climate because they offer convenience and value at a low price. They sell in small bundles which plays to tight budgets and have as their traditional customers families, students and seniors. In a weak economy they attract ‘shop down’ business.

Dollarama Inc. (TSX:DOL) based in Montreal is one such retailer and is on the IWB recommended list. It has annual sales of about $6 billion with roughly two-thirds of its stores in Ontario and Quebec. Its CEO said last week the trade war with the U.S. will have an impact on consumer spending across the retail industry – including discount stores. It also confirmed its expansion plan and increased its dividend.

Dollar General, (NYSE: DG) based in Tennessee, is one of the largest discount retailers in the US with annual revenues of US $40 billion. It favors rural locations with an average population of 20,000 or less. These communities are too small for the likes of Walmart and Target. Its shares rose 18% in March as markets fell.

 Here’s a closer look:

Dollarama Inc. (TSX:DOL) Closed Friday at C$159.95.

Background: Dollarama is one of Canada’s largest discount retailers with 1,616 stores, the bulk of which are in mid-size and large cities. It sells general merchandise including soaps and cleaners, paper goods, non-perishable groceries and school and party supplies. 

 It also owns 60% of the Dollar City chain which was founded in El Salvador and has 547 locations in Colombia, El Salvador, Guatemala, and Peru. Dollar City has plans to expand into Mexico next year.  

Performance: The shares are up 14% year-to-date.

Recent developments: Results released last week saw sales grow 15% in the y 14.8 per cent in the quarter ended Feb. 2 to nearly $1.9-billion. Net income grew 21% to $391-million or $1.40 per diluted common share.

Outlook: Dollarama has an impressive track record with a centralized warehouse facility in Montreal adding to efficiency. It has an expansive array of private label products (60% of sales) which helps it differentiate its store from the competition.

In a conference call, Dollarama said it plans to open between 70 and 80 new locations by early next year. It is ramping up activity in Western Canada, with the region accounting for 43% of all new stores in the past two years. It is building a warehouse and distribution centre in Calgary to support growth.

Dividend and buybacks: The company announced a 15% increase in its dividend which will now pay 10.58 cents per share quarterly. It yields 0.3% at the current price. It also has an share repurchase program.

  Dollar General Corp. (NYSE: DG)  All figures in US dollars. Friday close $84.60 Mar 25

Background:  Dollar General is America’s rural grocer, dominating in small communities where there are few shopping options. It has 20,000 stores and a demographic earning about $35,000 a year. These shoppers spend $15 on average per visit.

The stores sell paper and cleaning products, packaged and perishable food, and health and beauty items which account for 80% of sales. Most items cost $10 or less.

Performance:  The shares are up 25% year-to-date, but down 40% in the last 12 months.

Recent Developments:  Dollar General’s shares fell to a 6-year low in August when it trimmed forecasts for 2024. It cited inflation, weak consumer spending, difficulty in finding employees and operational inefficiencies among the challenges.

It is also under pressure from Walmart and Target who are aggressively pushing down prices on essentials.  

Its year-end released in mid-March showed a rebound. Earnings per share of $1.68 topped the consensus estimate by a 10% margin. Quarterly revenue rose 4.5% year-over-year to $10.26 billion.

Discussion & Outlook: The company has responded with a back-to-basics strategy that has reduced the number of products, refocused on high-demand products and added coolers to enhance its frozen and refrigerated product selection. It is reworking its distribution network to optimize logistics.

Dollar Geneal’s  big advantage is dominance in thinly populated and less affluent communities that cannot support Big Box retailers. It thrives on filling the gap between larger weekly shops some distance away. This advantage is unchanged.

Dividend: The$2.36 annual dividend, paid quarterly, yields 2.7% at current prices.  It has a program to repurchase up to 5% of its shares.

This article appeared in a recent issue of the Internet Wealth Builder.  For information on how to reprint this article please view this page.