Discount retailers face a challenging economy

Recent retailer earnings announcements indicate some headwinds for discount retailers, a category that had been faring well throughout the pandemic period. Last week, both Dollar Tree and Dollar General announced less-than-optimal first quarter results. Dollar Tree saw gross profit margins decrease by 3.4 percentage points year-over-year, which they attributed to elevated shrink (products that were lost, damaged, or stolen) as well as a shift in product mix to lower-margin consumables. Dollar General on the other hand, pointed to the challenging macroeconomic environment and its impact on their core customer as the reason for its 7.0% decline in net income. 

As the fastest growing retailer in the country (by announced store openings), Dollar General’s performance serves as an important portent for the industry. The company revised its outlook for this year, decreasing the number of planned store openings from 1,050 to 990, with most reductions concentrated in its Popshelf concept. Discount stores have comprised a significant portion of the demand for retail real estate, and with competitors like Party City filing for bankruptcy in January of this year, it remains to be seen whether these woes will extend to the rest of the category.

Thankfully, there are still many bright spots in the realm of store openings. Food users in the QSR and fast casual categories continue to expand aggressively, with Cava announcing plans to open 1,000 new locations over the next 10 years on the heels of its initial public offering. The athleisure category also continues to perform well, with Lululemon reporting a 24% year-over-year increase in sales; this growth is fueling the 50 net new stores it intends to open this fiscal year (albeit with a focus on international markets). Barnes & Noble has been staging a somewhat unexpected return to brick-and-mortar expansion, as the legacy bookseller plans to nearly double last year’s new store count of 17, with 30 new locations this year. 

^{Source: Co Star, JLL Research flourish chart}

Despite the turbulence discount retailers are facing, retail fundamentals are likely to remain stable in the near term. Deliveries of new retail space have declined steadily over the last decade and reached historic lows at the end of last year. On the heels of strong absorption in 2021 and 2022, these supply constraints have allowed retail vacancy to stabilize at 4.2% for the past two quarters, coinciding with modest rent growth across the country. And although this year has seen an increase in retail bankruptcies over the same period last year, that doesn’t necessarily point to a glut of space being put back on the market; Party City, for example, only plans to close 22 of the 800+ stores that they operate.

So what’s the lesson here, you ask? New store growth has slowed a bit due to economic headwinds, but has by no means collapsed. Also: don’t sleep on your local, hometown, publicly-traded, corporatized dollar store. They need your support too.