Shares of Dollar General Corp. and its smaller rival Dollar Tree Inc. were lower on Tuesday, continuing the trend seen since they reported weaker-than-expected second-quarter earnings.
Dollar General’s stock DG,
has fallen over the past seven consecutive days to a cumulative decline of 11.5%. The stock is on track to close at its lowest level since March 14, 2019, according to Dow Jones Market Data.
Dollar tree DLTR,
is down 23.2% in the third quarter and is on track for its worst quarter since the fourth quarter of 2007, before the financial crisis hit.
The two discounters should do well in the current uncertain climate. Instead, their stocks have struggled as consumers hit by high inflation have become cautious about how they spend their money and shop in more and more stores and more often to look for bargains.
Jeff Owen, Dollar’s chief executive officer, said his company implemented targeted price reductions on select key items in the second quarter to provide more affordable solutions to its customers.
“We are pleased with the customer response, both in terms of the size and composition of the basket, when the basket contains any of these items,” he said.
For more information read: Shares of Dollar General are plummeting after the retailer misses earnings estimates and lowers expectations
Dollar Tree’s second quarter was hit by an increased “shrink,” which can refer to damaged items but is also used to mean a spike in shoplifting. Many retailers have complained about the problem, which they say is caused by organized gangs.
To see: Walmart’s ‘shrink’ challenges differ from those of other retail giants, CEO says
Related: Target is confronted with ‘unacceptably high’ shoplifting and organized retail crime, says CEO
The company’s profits were sharply lower than the same period last year, and gross margins fell by more than 200 basis points.
UBS analysts on Tuesday highlighted another potential challenge facing hardline retailers in the US, namely the threat from Chinese players Temu, Shein and even TikTok.
These overseas discount e-commerce players have entered the U.S. retail market and “they are growing rapidly and gaining prominence,” according to analysts led by Michael Lasser.
“While these players offer attractive prices on a wide selection of general merchandise, they have inconsistent customer experiences. In addition,
retailers such as Walmart WMT,
Dollar Tree and Dollar General index heavily on consumables as a means of driving traffic,” the note said.
The analysts concluded that the perception of risk is greater than the reality, at least for now.
But the emerging players offer “a very tempting value proposition,” the note said. Temu and Shein in particular are highly competitive in the fast fashion and apparel space, offering products priced well below their brick-and-mortar counterparts.
They offer a fun and differentiated experience and have a huge social media presence. An August poll conducted by UBS and Numerator found that 83% were familiar with Temu and 74% with Shein.
“Yet fewer consumers have actually shopped at these retailers: 34% of respondents have made a purchase at Temu, 41% at Shein and 8% at Miniso. Furthermore, the average transaction is typically modest, with only 23% of consumers spending more than $50 per ride with Shein, compared to 17% and 7% for Temu and Miniso, respectively,” the analysts wrote.
The survey shows that consumers are most likely to shift their spending away from Walmart and Target, followed by Dollar Tree, Family Dollar and Five Below. Whether that turns out to be a temporary ordeal depends on how satisfying the experience is.
For now, the Chinese players’ long delivery times remain a hurdle, making it more likely that consumers won’t buy from them often or during peak holiday periods.
But if the emerging players collectively manage to take 50 basis points of US retail sales, that would rise to $33 billion by 2025, up from an estimated $10 billion to $15 billion currently. For comparison: Amazon’s AMZN,
Sales in North America are expected to reach approximately $350 billion by 2023.
Also read: Retailers are competing to be the first to host holiday sales in an effort to fuel sagging demand
“As e-commerce penetration increases in the US, we believe it will ultimately lead to further rationalization of physical stores. Our analysis shows that this will likely translate into the closure of 50,000 stores. This means that the emerging players’ risk is likely to be more disruptive to less well-positioned traditional incumbents, such as mall retailers,” the note said.
The exchange-traded Consumer Staples Select Sector SPDR fund XLP is down 4.6% over the past year, while the SPDR S&P Retail ETF XRT is up 0.5%. The S&P 500 SPX is up 16%.
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