What the Dollar Stores' Collapse Says About the Economy

And Other Alternative Economic Indicators

Author

Michael Batnick
September 05, 2024

I pulled into the train station parking lot this morning and experienced something that hadn’t happened in a long time. I had to drive all the way to the end to find a parking spot. Inside the train was the same story. I sat next to somebody in a two-seater for the first time in what feels like a lifetime. People were standing in the aisles!

As somebody who thinks of most things through the lens of markets, I can’t help but wonder, what’s the signal here? Is the economy so bad that people must physically go to the office?

I’m kidding, that’s not at all what I thought. But this type of nonsense has been popping up a lot lately. People are calling them “Alternative economic indicators,” and they’re always signaling a warning. For example, Business Insider (and others) recently ran a story that said strong sausage demand might indicate that the economy is slowing. They pulled this from a respondent in the Dallas manufacturing outlook survey. Mmkay.

This one is a real knee-slapper, via the St. Louis Beige Book: “Marina owners in Kentucky noted that boat rentals were lower, and customers were anchoring boats in coves and swimming instead of cruising the lake to save on gas.” Swimming is bearish. Got it.

Most recently, we’ve got what I’ll call “The Dollar Store” indicator. Dollar General reported miserable earnings last week, with same-store sales rising by just 0.5% during the quarter. As a result of their….results, and their dreadful guidance, the stock had its worst day ever, falling 32%.

Dollar Tree, its largest competitor, also didn’t have anything great to say on their call one week later. The stock fell 22%, its worst day since December 2000!

In the last two and a half years, these two stocks have seen their combined market cap collapse from $98 billion to $31 billion.

On their conference call Dollar General’s CEO said:

“We believe the softer-than-anticipated sales performance in Q2 is at least partially attributable to a core customer that is less confident of their financial position. I want to provide some additional context around what we're seeing and hearing from our customers. The majority of them state that they feel worse off financially than they were 6 months ago as higher prices, softer employment levels and increased borrowing costs have negatively impacted low-income consumer sentiment. As a result, our core customer who contributes approximately 60% of our overall sales comes predominantly from households earning less than $35,000 annually.”

What does this say about their customers and, more importantly, the economy? I don’t think a whole lot. Today and always, dollar stores serve a financially stressed consumer. These people never feel great financially. So maybe, just maybe, their quarter says more about dollar stores than their consumers and the economy.

To his credit, the CEO said the softer performance “is at least partially attributable to a core consumer,” and I buy that. I don’t know if it’s 15% or 50% responsible for their performance, but I think it’s more that their core customer is choosing other options. Walmart is the biggest retailer in the United States and their stock is at an all-time high. I know Walmart isn’t a dollar store, but it’s also not Louis Vuitton either.

I don’t want to act like I’m super plugged into the dynamics of the dollar store market. I don’t know if some adjustments can get them back on track or if the category is in secular decline. But I do know that the alternative economic narratives are completely ridiculous. Let’s get back to basics.