The uncertain macroeconomic landscape has caused consumers to rein in their spending and search for value. This has been a boon for off-price retailers in the consumer discretionary sector like The TJX Companies Inc. (NYSE: TJX) and Ross Stores Inc. (NASDAQ: ROST) but a detriment to the deep discount retailers like Dollar Tree Inc. (NASDAQ: DLTR) and Dollar General Co. (NYSE: DG). With deep discount dollar shops, you typically get what you pay for: low quality for low prices. Consumers want quality at a value that translates into premium brands at discounted prices. However, the tide may be turning with the dollar stores, as indicated by improving bottom lines and stock prices, causing investors to ponder if it's time to get back into Dollar General and Dollar Tree shares.

Dollar General: The Big Fish in Little Towns  

The playbook is to be the big fish in a little pond, lots and lots of little ponds. In terms of retail, that means operating over 19,000 stores in lots of little towns with an average store size of around 7,500 square feet. Dollar General doesn't compete with the big box stores like Walmart Inc. (NYSE: WMT) or Target Co. (NYSE: TGT). Instead, their stores are located in areas the big box stores wouldn’t touch because the populations are too tiny. Dollar General stores target towns with populations that average less than 20,000 residents. Texas has the most Dollar Generals, with nearly 9% of the total store count in the state.

Dollar General: More Than a Dollar Store, A Discount Retail Chain

While Dollar General has some items that sell for $1 with Dollar Deals, they aren't technically a dollar store. They are a discount chain that offers mostly groceries and household items along with a limited assortment of electronics, apparel and toys. By apparel, it's mostly the basics like hoodies, T-shirts, sweatpants, socks and underwear.

The formula had been successful until recent quarters when the economy took a toll on consumer spending with lower-income shoppers. Residents of rural towns felt the pinch of inflation and higher interest rates, which made itself evident in Dollar General's bottom line. However, its recent quarter indicates signs of a turnaround.

Dollar General Rises Despite Hurricanes

For its third quarter of 2024, Dollar General reported an EPS of 89 cents, which still missed consensus estimates by 5 cents. However, revenues grew 5% YoY to $10.18 billion, beating consensus estimates of $10.14 billion. Same-store sales rose 1.3% YoY. Selling, General and Administrative (SG&A) expenses included $32.7 million in hurricane-related expenses. 

The company issued full-year 2024 EPS guidance of $5.50 to $5.90 versus $5.82 consensus estimates. Full-year 2024 revenues are expected to grow 4.8% to 5.1% compared to earlier forecasts of 4.7% to 5.3%, equating to $40.55 billion to $40.67 billion versus $40.52 billion consensus estimates. Same-store sales are expected to grow between 1.1% and 1.4% YoY.

Real Estate Projects Expected

The company expects 4,885 real estate projects, including opening 575 new stores in the United States and up to 15 in Mexico. Through Project Elevate, they expect to fully remodel 2,000 stores and upgrade 2,250 stores while relocating 45 stores.

Dollar General’s reinstated CEO Todd Vasos commented, “While we continue to operate in an environment where our core customer is financially constrained, we delivered same-store sales near the top end of our expectations for the quarter. We believe our Back to Basics efforts contributed to these results, as we have continued to improve our execution and the customer experience in our stores.”

Dollar Tree: Dollar Stores Selling 90% of Items at $1.25 or More      

As the name implies, Dollar Tree stores are actually stores that sell items for $1, actually $1.25 (or more). Dollar Tree also owns Family Dollar stores. The company operates over 16,590 stores across 48 states and five Canadian provinces.

Under its portfolio optimization review, the company has identified 970 Family Dollar stores to close, of which it has closed 670 stores so far, with 25 more to close in the remainder of 2024. The company is still considering strategic alternatives for its Family Dollar stores.

Things have improved for Dollar Tree recently as customers get adjusted to the $1.25 baseline price for 90% of the items in its stores.

Solid Q3 Results: EPS Beats After 3 Misses and Revenue Beats After 4 Misses

Dollar Tree reported a third-quarter 2025 EPS of $1.23, beating consensus estimates by 5 cents. This was the first EPS beat after three previous quarters of EPS misses. Revenues rose 3.5% YoY to $7.57 billion, firmly beating $7.45 consensus estimates. Again, this was the first upside revenue beat after four misses.

Enterprise comps rose 1.8%, up from 0.7% in Q2. Enterprise comps were driven by a 1.6% increase in traffic and a 0.2% increase in average tickets. This was its first positive ticket since the fourth quarter of 2022. 

Snack, Candy, and Beverages Were the Best Sellers

Dollar Tree consumer's comps were 6.2% which was impressive, lapping last year's comps growth of 11.1% YoY. Family Dollar comps rose 1.9% versus fell 0.1% in Q2, driven entirely by traffic. The average ticket was flat for the past three consecutive quarters. Consumable comps were the best category, which included snacks, candy and beverages. Even Family Dollar consumables comps rose 1.3%, lapping last year's comps of 6.2%.

Discretionary Headwinds Continue to Persist

Dollar Tree management noted that customers are still buying for need and are closer to the time of that need. There is still a lot of belt-tightening for its budget-constrained lower-income customers and even to a lesser extent with its middle-income and high-income families with young children. Lower middle-income households are shifting more of their spending towards food at home.

Dealing With Potential Trump Tariff Headwinds

The company addressed the potential of Trump tariffs and its plans for addressing them. The bulk of its merchandise is sourced from overseas. In 2018 and 2019, the company mitigated tariff impacts by negotiating lower costs with suppliers, changing product pack sizes and specs, and dropping non-economical products. It has detailed backup plans to shift its supply chain for more products to alternate countries.