Image Source: Pixabay

The dollar-store industry intrigues me, in part because I used to be part of its growth story -- back when it was, in fact, growing.

These days, of course, there’s a lot more pressure on the concept. And much of it is the fault of Dollar General (DG) and Dollar Tree (DLTR). As of the time of writing, the year-to-date returns for those stocks are -47% and -56%.
 

So what went wrong? The concept began as a great one back in the 1950s. That was when J.L. Turner and Son – a Kentucky-based general store chain that had been up and running since 1939 – decided to sell goods for a buck. People loved it, and why wouldn’t they?

The economy was growing quite nicely with low unemployment. And retailers were busy exciting consumers with new concepts like credit cards and indoor malls. These facilitated the sale of increasingly popular products such as:

• Portable radios and record players
• Dishwashers
• Microwave ovens and TV dinners
• Roll-on deodorant
• Barbie dolls and Mr. Potato Head

But that didn’t mean housewives and their husbands didn’t care about their budgets. And after all, a bargain is a bargain. As the decades continued, inflationary forces began to take their toll. The cost of living grew ever more expensive, and many job opportunities decreased thanks to outsourcing.

In 1971, according to Pew Research, 61% of U.S. adults lived in middle-class households. In 2023, that number had plunged to 51%. And so, despite the rise of YOLO (you only live once) and FOMO (the fear of missing out), the dollar store appeal stayed strong.

What began to decline, I would say, is the common sense of dollar store management teams. Seeing opportunity everywhere, they threw caution to the wind and went hard on expanding their respective chains. And now they’re paying the price.

Dollar Stores Used to Have It Made

I know firsthand how business-smart dollar chains used to be. In 1992, I built my first Dollar Tree store in Laurens, South Carolina, with plenty more dollar store deals to come. Some I arranged capital; some I kept to rent out -- often for far less profit in the end.

There was this one Family Dollar location I owned, leasing it for something like $3.00 per square foot. That could have been a great gig at the time under a triple-net contract, where my tenant also paid taxes, insurance, and maintenance costs.

Unfortunately, I made a mistake. Under the deal we did sign, I was responsible for covering the damage whenever the toilet was broken or the roof sprang a leak or the parking lot needed to be repaved. That’s how I ended up making very little money as a landlord for such properties. Family Dollar was squeezing every last penny out of me. And I know I wasn’t alone.

Young as the dollar-store industry was back then from a nationally recognized perspective, the men and women who ran Family Dollar, Dollar Tree, and Dollar General knew how to make their margins work for them.

Their products were cheaply made in China and other developing nations. And then they kept even more of their profit margin by signing property deals with landlords like me -- landlords that would pay for upkeep of the property.

But that only lasted for so long. China, of course, began to expect more from its economic bargain with the U.S. Its citizens were increasingly joining the ranks of the middle class, and they wanted higher wages as a result.

Meanwhile, back here in the U.S., real estate investment trusts (“REITs”) began scooping up more and more dollar store properties, whether stand-alone buildings or shopping centers.
 

Source: Wide Moat Research

And these landlords were far less generous than I used to be.

It Just Keeps Getting Worse for Dollar Stores

Realty Income (O), Agree Realty (ADC), NetStreit (NTST), and other REITs did and continue to do what I should have done. They operate with triple-net lease contracts, offering their tenants cheaper rents but far more responsibility.
 

As such, dollar stores’ costs increased further, all while their prices stayed the same. Plus, wages here in the U.S. keep growing, so their employees take up even more of their bottom line.

That’s why, to stay competitive as publicly-traded business entities, they turned to expansionary efforts. For instance, Dollar Tree bought up Family Dollar in 2015. It was an $8.5 billion “deal” that included another $1 billion in debt.

We know now what a mistake that decision was. Corporate announced earlier this year that it might part ways with the brand altogether. And it’s closing nearly 1,000 stores nationwide regardless.

Both Dollar Tree and Dollar General – which continue to keep growing their store counts in spite of the signs – are also struggling from overexpansion. Put simply, there are too many of them out there, eating into each other’s profits as well as their own.

How many dollar stores do you really need per neighborhood? It turns out, not as many as they’ve built. That’s especially true considering how so many of them are sloppy, crowded, and frankly just depressing places to shop. It’s made consumers much more willing to spend money elsewhere. Worse still, “shrink” – a nice word for damaged and, more often than not, stolen goods – is on the rise. So, there’s really no winning in the industry. Not as-is.

Innovate or Die

Every business model reaches a mature stage. They can’t expand at an intense clip forever. And, as late and great management consultant Peter Drucker once said, “companies must innovate or die.”

Do I expect dollar stores to collapse completely? The simple and easy answer is no. But they are going to have to figure out how to keep operating in this changed and changing world.

In the latest quarter (ending Aug. 2) Dollar General reported weaker than expected results: earnings per share (“EPS”) of $1.70 a share versus analysts’ expectations of $1.79 per share. Management indicated that it had made progress on its turnaround – dubbed Back to Basics – and acknowledged that trends across the business remained soft (due to consumer constraints). Analysts expect another weak year in 2025 as earnings contract (estimates are -23%).

Dollar Tree also reported weaker results: EPS of $0.62 versus analysts’ expectations of $1.04 per share. Persistent inflation and reduced government benefits have taken a toll on customer trends. The company also cut its full-year earnings guidance of $5.20 to $5.60 in fiscal 2024 (from its previous $6.50 to $7.00 per share). Dollar Tree has sold off around 50% year-to-date.

That’s why I expect 2025 to be a year of decision for the industry, full of sell offs, closures, and other big decisions. The short-term costs might be steep, but I think we’ll start to see something much more investable this time next year.

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