Dollar Store Investors See Green in a Sea of Red This Week

(Bloomberg) -- Dollar Tree Inc. and Dollar General Corp. are among the best performers so far this week in the broadly negative S&P 500 Index as fears escalate that the U.S. economy could be slipping into a coronavirus-driven recession.

“In general, dollar stores execute better in a recession,” Loop Capital analyst Anthony Chukumba said Wednesday in a phone interview. Consumers tend to “trade down from higher-priced alternatives” like grocery stores, pharmacies, and even discount retailers such as Walmart Inc. and Target Corp., because they tend to make smaller purchases, he said.

Chukumba favors Dollar General, which gets the vast majority of its sales from consumables. He rates the stock a buy. He has a sell rating on Dollar Tree, which has faced challenges integrating the Family Dollar chain it bought in 2015. Dollar General reports fourth-quarter results Thursday morning.

The chance of a U.S. recession within the next 12 months has surged to the highest reading since the country exited the last downturn in 2009, according to a Bloomberg Economics model.

Morgan Stanley analyst Simeon Gutman wrote earlier this week that discount/dollar stores are among retail segments “least vulnerable” to an economic slowdown. Comparable-store sales -- a key retail metric -- for discount/dollar stores have had a negative correlation to changes in gross domestic product growth since 1992, he said. According to U.S. Census retail sales for the same period, grocery and auto parts have 0.20 and 0.44 correlations, respectively. “Logically, retailers in these segments should have the lowest earnings sensitivities to any slowdown in GDP growth.”

In addition, dollar stores have been benefiting from panic buying caused by coronavirus fears, Bloomberg Intelligence analyst Jennifer Bartashus wrote in an email. “Many shoppers at these stores are hourly workers, so there may be some fear of lost wages on the horizon.”

Only a handful of stocks in the S&P 500 are in positive territory this week. Dollar Tree shares are up more 5%, after hitting a two-year low on Thursday, while Dollar General has gained less than 1%. Auto parts retailers O’Reilly Automotive Inc., Autozone Inc. and Genuine Parts Co. have also outperformed.

To contact the reporter on this story: Janet Freund in New York at jfreund11@bloomberg.net

To contact the editors responsible for this story: Catherine Larkin at clarkin4@bloomberg.net, Lisa Wolfson

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