With rampant inflation on both sides of the Canada-US border, property prices have skyrocketed. This had a huge impact on the finances of consumers, who have yet to fully recover from the impact of COVID-19.
Federal governments, both in the United States and in Canada, have decided to raise interest rates in the hope of controlling excessive inflation. However, rising commodity prices have forced many consumers to cut back on spending and look for cheaper places to buy groceries and a range of other products.
This has created a strong tailwind for discount stores and low-cost retailers who are somewhat immune to the inflationary pressures visible in all sectors of the economy. As more consumers look for ways to make their shopping dollars grow, the following companies are well-positioned to benefit in the near term, until at least access inflation in the market. economy is beginning to be mopped up.
A US discount retailer, Dollar General (DG) sells branded and private label products in a wide variety of categories in more than 17,000 stores in 46 states. The company’s primary focus is value, reflected in the fact that over 80% of its items are priced at US$5 each or less.
The company’s customer base is economically modest, typically with an annual family income of $40,000 or less. “These shoppers demand value across a wide range of products, but Dollar General has done well to focus its assortment behind a limited number of items across a broad range of categories,” a Morningstar equity report said.
The focus on lower cost items also serves as a bulwark against digital competition. “While online-only rivals benefit from avoiding store operating expenses, smaller items have little room to absorb shipping costs,” said Morningstar equity analyst Zain Akbari, adding that “the Dollar General’s average shopping cart consists of approximately five items in total, transaction size of approximately $12.”
Despite intensifying competition, Dollar General’s network of conveniently located stores and low-priced items should allow it to generate economic returns, says Akbari, who recently raised the stock’s fair value to $203 from $190.
Dollar Tree (DLTR) operates discount stores in the United States and Canada and sells branded and private label products, generally priced at US$1.25. Nearly 50% of Dollar Tree store sales in 2020 came from consumables (including food, health and beauty, and household paper and cleaning supplies), just over 45% from miscellaneous items ( including toys and household items) and 5% seasonal products.
Dollar Tree has a long history of strong performance, made possible by its differentiated value proposition. “We argue that stores of the same name exhibit more favorable competitive positioning,” a Morningstar equity report said. “The differentiated concept has the vast majority of items priced at $1.25 (which the company increased to $1 at the end of 2021), simplifying the company’s value proposition (although the company has added a small section of slightly more expensive items).”
The company quickly changes assortment items, creating a scavenger hunt experience, driving in-store traffic. “This approach helps insulate the segment from digital competitors, as the customer’s thirst for value and the modest, fixed price of most items encourage shoppers to visit frequently,” says Akbari.
The low cost and impulsive nature of Dollar Tree’s offerings primarily attract low- to middle-income consumers to its locations. “While this cohort is receptive to the charms of digital retail, we believe the dollar store segment is better protected than most, as the low price and limited basket size (average transaction of $8) leave little room for online retailers to economically absorb shipping costs,” says Akbari, who recently increased the fair value of the stock to US$111 from US$106.
A value-driven retailer, Five Below (FIVE) operates 1,020 stores in 38 US states, catering to teen and tween consumers. The stores carry a wide variety of merchandise, the vast majority of which are under US$6. The company’s products fall into several categories, including leisure (sporting goods, toys and electronics; 47% of 2020 sales), fashion and home (beauty products and accessories, 36% of 2020 sales) and parties and snacks (seasonal items, candy, and beverages; 17% of 2020 sales).
Five Below frequently updates its wide range of trend-driven items, which keeps shoppers coming back and helps keep the attention of tween and teen customers. “This approach helps insulate the company from digital rivals, as the customer’s thirst for value and modest pricing (items priced at $5 or less) drive traffic while enhancing Five Below’s ability to leverage both routine errands and more impulsive visits,” reads a Morningstar stock report.
The retailer has generated consistent returns by leveraging a differentiated concept and a cautious expansion strategy. “The business should be able to grow profitably as its agile supply and distribution network is well suited to meet the ever-changing demands of its customers (tweens, teens and their wealthy parents),” says Akbari.
The company offers a variety of items in a bespoke store environment while providing parents with some cost certainty. Such a concept remains “attractive to buyers across a range of economic scenarios,” says Akbari, who pegs the stock’s fair value at US$151.
