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Dollar Stores Have the Formula for Beating the Pandemic Blues

While their department and specialty store counterparts mostly struggled from the pandemic-related economic downturn in the second quarter, dollar stores have flourished.

Though wallet-friendly chains incurred costs related to COVID-19 and civil unrest, these added expenses were more than offset by significant increases in net sales during the quarter. And in contrast with the many brands and retailers that suffered sizeable net losses in the period, these affordable neighborhood stores were fortunate to turn in profits.

Dollar General

Dollar General reported a net sales increase of 24.4 percent to $8.7 billion in the second quarter ended July 31, including positive sales contributions from new stores and growth in same-store sales, modestly offset by the impact of store closures.

Same-store sales increased 18.8 percent compared to the second quarter of 2019, driven by an increase in average transaction amount that was partially offset by a decline in customer traffic. Same-store sales increased in each of the consumables, seasonal, home products and apparel categories, with the gain in home products.

The company said it believes consumer shopping patterns were influenced by Covid-19 and had a significant positive effect on both net and same-store sales.

The company reported net income rose 84.6 percent to $787.6 million for the quarter. Diluted earnings per share (EPS) increased 89.1 percent to $3.12 in the period compared to diluted EPS of $1.65 in the second quarter of 2019.

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Gross profit as a percentage of net sales was 32.5 percent in the quarter compared to 30.8 percent in the year-ago period. The gross profit rate increase was attributable to higher initial markups on inventory purchases, a greater proportion of sales coming from the non-consumables product categories, which generally have a higher gross profit rate than consumables products, and a reduction in markdowns.

These factors were partially offset by increased distribution and transportation costs that were impacted by the Covid-19 pandemic in the form of increased volume and discretionary employee bonus expenses.

“As the neighborhood general store for thousands of communities across the country, we appreciate the importance of our role in providing customers with affordable, convenient and close-to-home access to everyday essentials,” Todd Vasos, Dollar General’s CEO, said. ““We continue to operate from a position of strength and are excited to announce the acceleration of several key strategic initiatives, including the rollout of DG Pickup, DG Fresh and our Non-Consumables initiative, as well as an increase in our expected number of real estate projects for fiscal 2020. Our robust portfolio of initiatives, coupled with our expansive real estate footprint of nearly 17,000 store locations, positions us well to continue delivering value and convenience for our customers.”

Dollar General noted that from Aug. 1-25, same-store sales increased approximately 15 percent year over year.

Due to the significant uncertainty that continues to exist around the severity and duration of the COVID-19 pandemic, including its impact on the U.S. economy, consumer behavior and the company’s business, the company is not issuing updated fiscal 2020 sales or EPS guidance at this time.

However, for the 52-week fiscal year ending Jan. 29, 2021, the company now expects capital expenditures in the range of $1 billion to $1.1 billion, compared to $925 million to $975 million reiterated on May 28, and 2,780 real estate projects, including 1,000 new store openings, 1,670 mature store remodels and 110 store relocations.

Dollar Tree and Family Dollar

Dollar Tree Inc. reported net sales for the second quarter ended Aug. 1 increased 9.4 percent to $6.28 billion. Same-store sales were up 7.2 percent in the three months, with Family Dollar increasing 11.6 percent and Dollar Tree up 3.1 percent.

“Our store and distribution center teams have done a remarkable job of serving customers through an incredibly dynamic time in retail,” Mike Witynski, president and CEO of Dollar Tree, said. “The teams delivered…a 180 basis point improvement in gross profit margin and a 130 basis point increase in operating profit margin, despite incurring COVID-19 and civil unrest-related costs exceeding $150 million in the quarter.”

The company said the increase in gross margin was driven by improved merchandise costs, including freight, leverage on occupancy costs from stronger same-store sales, reduced markdowns and improved shrink results, partially offset by higher distribution costs, which included $11.4 million in Covid-19-related payroll costs and incremental tariffs of approximately $10.8 million.

Operating income for the quarter improved 39.4 percent to $374.9 million. The second quarter included incremental operating costs of $134.9 million for Covid-19-related expenses. During the quarter, the company also experienced store damage, lost inventory and other costs of $16.8 million related to civil unrest in some communities.

Net income for the period rose 45 percent to 261.5 million and diluted EPS increased 44.7 percent to $1.10.

The company opened 131 new stores, expanded or relocated 22 stores, and closed 26 units. Dollar Tree continues to expect the completion of 500 new store openings–consisting of 325 Dollar Tree and 175 Family Dollar and 750 Family Dollar H2 store renovations in fiscal 2020.

“Consumer shopping patterns are evolving,” Witynski said. “Customers are shopping with a purpose, while looking to minimize risk and exposure. As a result, we are seeing material increases in average ticket, while seeing a decline in average visits. At Dollar Tree, we were pleased to see a nice bounce back in the higher margin discretionary side of the business following Easter, and the expanded Crafter’s Square assortment continues to perform very well.”