Dollar General and Dollar Tree Stock are similar but different

This week, Dollar General Inc. NYSE:DG AND Dollar Tree Inc. NASDAQ:DLTR have released earnings reports showing that low-income consumers, who make up a significant portion of their customer base, remain under pressure. Both retail stocks fell following their respective reports.

It didn’t help that recent consumer price index (CPI) and producer price index (PPI) readings were warmer than expected. The PPI reading is particularly concerning because it suggests that the increased costs that manufacturers are experiencing will be passed on to consumers in the coming months.

The two discount chains released different reports

Dollar General reported a mostly positive earnings report. Earnings per share (EPS) of $1.83 on revenue of $9.86 billion beat estimates of $1.74 billion and $9.77 billion, respectively. The company continues to struggle with right-sizing its inventory. This is creating a drag on profits, which the company expects to extend into 2024.

Dollar Tree, by contrast, missed both revenue and earnings. Comparable store sales increased for the company’s flagship Dollar Tree brands. However, this was partially offset by declines in comparable sales at Family Dollar stores.

The company also announced it will close 670 Family Dollar stores in the first half of 2024. Another 370 Family Dollar and 30 Dollar Tree locations are under review for closure over the next three years.

Like Dollar General, Dollar Tree also posted full-year guidance that was slightly lower than analysts’ estimates.

The consumer is under pressure

As different as the earnings reports were, there was a common theme. The low-income consumer in the dollar store’s core market is under pressure. Both companies, albeit in different ways, have emphasized that they are dealing with inventory shortages.

Dollar Tree implied that shrinkage was a factor in store closures. Dollar General cited shrink as the reason the company would remove self-checkouts in many locations.

Participate in DG or DLTR actions

Dollar General analyst ratings on MarketBeat give the stock a consensus rating of Hold. However, the day after the report, two analysts upgraded DG stock, with JP Morgan Chase & Co. New York Stock Exchange: JPM raising their price target to $158 from $120.

In contrast, Dollar Tree analyst ratings on MarketBeat maintain a Moderate Buy rating on DLTR stock, but three analysts lowered their price targets following the earnings report.

As long as the consumer remains under pressure, it is likely to be a volatile time for both companies. A trick seems like the best way to play it for now.

However, both stocks are trading near the middle of their 52-week range. If you believe there is some upside if the economy strengthens in the second half of the year, Dollar General could offer a better value. The company’s problems appear to be more of a larger economic issue. Dollar Tree is closing stores, which could provide a quick boost to earnings but isn’t likely to produce sustainable growth.

Another factor to consider is DG’s stock dividend, which the company has grown at an average rate of 18% over the past three years.

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