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Dollar Stores Profit Handsomely During Pandemic

Dollar stores, which tend to do well when times are hard, scored strong sales and profit growth in the first quarter of the year as the pandemic set in. Unlike most physical retail categories, they are also still planning to open new stores.

Dollar General

Dollar General, the largest dollar store brand with about 16,000 locations, has done particularly well recently. Its comparable-store sales ballooned by 21.7% during Q1 compared with a year ago. 

The Tennessee-based company's operating profit shot up almost 69.2% during the quarter to $867M, compared with $512M in Q1 2019. As a percentage of net sales, Dollar General's operating profit came in at 10.3%, up 253 basis points from last year.

As people started to feel the impact of the pandemic, they started shopping en masse for the kind of inexpensive staples that Dollar General sells. Another advantage for the dollar store giant is its many locations, GlobalData Retail Managing Director Neil Saunders told Retail Dive

"This localness was a major advantage during the crisis when many households were reluctant to travel too far and some were nervous about visiting big-box stores," he said.

Growth really started to take off for Dollar General in March, just as the nation started shutting down. In February, comparable-store sales growth year-over-year was a healthy 5.5%, but in March, the increase was 34.5% compared with a year earlier.

"We believe the impact of COVID-19 significantly benefited operating profit in Q1, primarily through higher sales, partially offset by approximately $80M of incremental investments that we made in response to the pandemic," Dollar General Chief Financial Officer John Garratt said during the company's earnings call on Thursday.

In response to strong demand, Dollar General has hired over 50,000 workers since mid-March, about twice its normal hiring rate. It has also paid about $60M in bonuses to existing workers.

Dollar General, which has pursued vigorous expansion in recent years, plans to continue its expansion. During the first quarter, it opened 250 new stores and remodeled 481 stores. By the end of the year, it expects to have opened a total of 1,000 new stores and remodeled 1,500.

The company expects the second quarter to be strong, but not as strong as Q1. 

"There are a number of factors [that] suggest that sales will moderate to more normalized levels beginning during the latter part of Q2," Garratt said.

Those include the duration and impact of shelter-in-place restrictions and social distancing measures, the gradual reopening of other retailers and the tapering of benefits included in recent stimulus legislation, Garratt said.

Even so, investors seem to believe in Dollar General's prospects. Six months ago, its stock traded at about $154 per share. As of Monday, it is trading at more than $191 per share.

Though not enjoying growth quite as strong as Dollar General, close rival Dollar Tree has also enjoyed a recent surge in business

Dollar Tree, which has about 15,300 stores in the U.S. and Canada under two brands, enjoyed an overall comparable-store sales increase of 7% year-over-year. Its Family Dollar brand saw comparable-store sales up 15.5%, but its Dollar Tree-branded stores, which carry less food and fewer other consumables than other dollar stores, experienced a 0.9% comparable-store sales drop.

The Virginia-based company reported that its gross profit increased 3.9% year-over-year to $1.79B during the first quarter of 2020.

Like Dollar General, Dollar Tree expects to open new stores in 2020, though not as many. Its current forecast is for a net of 500 new stores by the end of this year.