Discount Retailers Expected to Win Holiday Season

The K-shaped economy has many analysts looking to the fringes of the retail section, both high-end and low-end. This week, we’ll get earnings from multiple discounter names, including Dollar Tree (DLTR) this morning, Five Below (FIVE) after the bell, and Dollar General (DG) tomorrow morning.

While these numbers won’t show holiday shopping, they can be a useful look at how consumer spending is shifting and preview what is to come. It’s no secret that lower-income Americans are under pressure, with rates still high, tariffs persisting, and the unemployment market showing cracks. As long as discounters are strong, that cohort is still spending – if they aren’t, there’s few places to trade down further.

Dollar Tree (DLTR) is considered by many on the Street to be the most challenged of the discounters; Likefolio’s visits data has it limping behind its peers, among other metrics. However, the company beat 3Q estimates and is higher premarket, with adjusted EPS of $1.21 (+8% year-over-year) and revenue of $4.75 billion (-37% year-over-year).

That’s a hefty revenue drop – but, remember that they sold the Family Dollar brand in the summer. By their own metrics in the press release, excluding that part of the business, revenue grew 9.4%.

Same-store sales grew 4.2%, with average ticket up 4.5% despite traffic falling 0.3%. CEO Mike Creedon said they saw an “all-time record Halloween season,” and they opened 106 new stores in the quarter. Before the open, DLTR is up 45% year-to-date and 53% vs last year.

The market seems happy with those results so far, so let’s preview the other two names.

Zacks expects Five Below (FIVE) to report EPS of $0.22 (-48% year-over-year) and revenue of $969.89 million (+15% year-over-year). Several analysts raised their price targets on the stock yesterday, so they anticipate strength. Last quarter, they grew revenue over 20%, and investors may be more forgiving of that EPS drop if growth continues apace.

The options market is anticipating a +/- $4 move, or about 2.5%. FIVE is up 71% vs last year and 51% year-to-date.

For Dollar General (DG), Zacks estimates EPS will be $0.92 (+3.4% vs last year) and revenue of $10.61 billion (+4%). An Oppenheimer analyst wrote yesterday that it will likely post in-line comparable store sales. While Amazon’s (AMZN) grocery expansion has impacted the stock, the analyst believes “concerns are overblown.” While these growth numbers are lower than its peers, keep in mind that it is by far the biggest.

DG is up 42% vs last year and 45% year-to-date. The options market implies a +/- $8 move, or around 7.3%.

Altogether, discounters and dollar stores have had a strong run this year. Investors will have to decide why: are more consumers driven to trade down? Are they offering particularly good deals? Do their offerings meet the needs of their communities? What makes up their strength, and how long can it last? With delayed economic data from the government, retail earnings are one of the better windows into consumer health.

Tune into the Schwab Network for earnings breakdowns and more!

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