Dollar General, other discount retailers stand to gain from Dollar Tree's troubles

With Dollar Tree (DLTR) set to close 1,000 locations, shoppers will be on the hunt for a new budget destination.

Places that are already competing with the dollar store chain will likely pick up the extra traffic. Dollar Tree announced on Wednesday that it plans to close 600 Family Dollar stores in the first half of fiscal 2024, and another 370 Family Dollar and 30 Dollar Tree locations once their current leases expire.

Neil Saunders, GlobalData’s managing director of retail, told Yahoo Finance that different chains may benefit. "It's Walmart (WMT) in some locations, in other locations, it's Dollar General," while discount grocers like Aldi or other local options could also become the new go-to.

Dollar Tree itself could keep some of the customers. "There's going to be some amount of recapture ... may be near another Family Dollar Store or near a Dollar Tree store where they can pick up some of those sales," Telsey Advisory Group's managing director Joe Feldman told Yahoo Finance.

Many discount retailers have seen an uptick in foot traffic in recent years, according to Placer.ai, as the prices of food and household goods have become increasingly expensive. Discount and dollar stores saw a 7.1% jump in foot traffic so far this year, but Family Dollar has lagged behind with a slight increase, up 0.5%, the smallest amid all the chains.

Dollar Tree CEO Richard Dreiling said on an earnings call that the company could lose $730 million in annual sales due to the store closures, which gives other better-performing players an opening to take a piece of that pie.

But "the gains are probably not going to be enormous," since the stores targeted for closure are likely smaller locations, said Saunders.

Stores that offer low-priced groceries will likely be the strongest competitors for new customers, as 80% of items sold at Family Dollar in 2023 were consumables, said Feldman.

Dollar Tree makes more of its sales in home goods, which can limit how many former Family Dollar shoppers it picks up. However, the chain has been making inroads, gaining customers across the income spectrum. Dreiling said that most of the 3.4 million new customers the company added in 2023 had a household income of over $125,000.

The loss of Family Dollar stores will be most acutely felt by consumers in food deserts, who depend on the store for everyday shopping.

"A lot of people use because they're convenient, because they're a local store where they can just do a quick pickup of some consumables that they want, so if these stores close, potentially that's quite frustrating for people in that area because they might have to travel further," Saunders said.

This could also prove troublesome for landlords, he added.

"Landlords potentially going to be left holding vacant units if they're not able to fill them, so they're another potential loser in all of this," he said.

Following the announced closures, shares of Dollar Tree are now down 8% this year, while Dollar General shares are up over 10%.

This comes as Dollar Tree announced another disappointing quarter. In Q4, the company posted revenue and earnings that missed Wall Street's expectations, running a net loss of $1.7 billion, compared to net earnings of $452 million from a year ago. For fiscal 2023, the company lost $998 million, versus a profit of $1.6 billion in 2022.

Dollar General, on the other hand, beat revenue expectations, posting $9.86 billion in revenue for the fourth quarter against an expected $9.78 billion. It also forecast better-than-expected first quarter same-store sales.

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Brooke DiPalma is a senior reporter for Yahoo Finance. Follow her on Twitter at @BrookeDiPalma or email her at [email protected].