However, one area within the retail sector that has displayed solid relative strength is the dollar/extreme value segment. Dollar Tree (DLTR), Dollar General (DG), and Wal-Mart (WMT) are all currently trading near all-time highs, while Five Below (FIVE) and Ollie's Bargain Outlet (OLLI) hit high water marks last month.
A few different catalysts are propelling these stocks.
First, relative to other retailers, same store sales and traffic growth has been strong among value names. For example, DLTR and DG reported Q1 same store sales growth of +2.2% and +3.8%, respectively. Meanwhile, traditional retailers like Kohl's (KSS), JC Penny (JCP), and Dick's Sporting Goods (DKS) have experienced yr/yr declines in comps.
This speaks to the intense pressure traditional retailers face from online competition. Dollar stores aren't as exposed to that threat due to the nature of their catalogs, as they generally offer an assortment of consumable and low-cost goods that aren't as suitable for shipping.
Also, while extreme value retailers have been impacted by tariffs, they could be a beneficiary due to pricing power. In fact, both DLTR and DG have warned recently that they may abandon their $1 price for certain products.
Full price retailers may also look to offset tariff costs with higher prices, but this could drive some customers towards low cost retailers, which may have more room to bump prices higher.
Lastly, there are some company-specific factors in play. For DLTR, the company is executing a major renovation initiative, particularly for its Family Dollar stores. It plans to remodel 1,000 stores this year alone, in addition to closing several hundred under-performing stores.
DG is transitioning to a self-distribution model for perishable goods, enabling it to lower product costs while driving higher in-stock levels of those goods. It is also launching its "Fast Track" initiative to boost labor productivity and improve customer convenience. This transition includes the addition of self-checkout stations as well as streamlining its stocking process through one-touch unloading.
Key Takeaway: Dollar store stocks have been notably strong within a struggling retail sector. Investors may be gravitating towards these names because rising prices at full price retailers may drive more traffic to value peers. They also have less exposure to pressures from online/digital competitors.