These 2 Dollar Store Stocks Can Handle a Recession

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Although each new year usually starts auspiciously from a sentimental perspective, 2022 immediately brought a rude awakening to Wall Street. Faced with soaring global inflation, central banks had no choice but to respond with higher interest rates. Unfortunately, this imposed sawing effect significant pressures on the wider economy. In this context, investors should really consider the fundamental value of dollar store stocks, especially DLTR and DG tickers.

Let’s set the context for which dollar store stocks find themselves in the spotlight. The 2020 pandemic shutdowns resulted in severe economic penalties. To shore up a desperately spiraling situation, Washington then approved several rounds of fiscal and monetary stimulus packages. While these measures arguably saved the US economy from destruction, they also contributed to an unprecedented expansion of the money supply.

Now the Federal Reserve finds itself in the delicate position of mitigating the dampening. It’s also an unenviable circumstance, because the Fed is committed to hawkish monetary policy reverse previous excesses. In short, the central bank will undo previous easy money policies in an attempt to stop inflation.

The tricky part for the Fed is that deflating the money supply could also end up deflating the economy. After all, higher interest rates directly correspond to higher borrowing costs. This hurts risky names that focus on growth, not value derived from earnings.

However, the narrative could work for dollar store stocks. Although part of the larger retail industry, these entities provide essential goods at ultra low prices. Such a business model will appeal to hard-hit consumers at all income levels, thereby benefiting DLTR and DG.

American multi-price chain of discount variety stores, Dollar Tree enjoys a large addressable market. As of October 2022, Dollar Tree had 7,882 locations in the United States, spanning 49 states and territories. Currently, Texas has the most stores, with 666, followed by California, with 642. Florida rounds out the top three with 587.

Basically, DLTR represents one of the dollar store stocks to consider for your portfolio due to its intense relevance. As earnings reports from popular discretionary retail powerhouses have demonstrated, consumers are keeping their wallets closed. In turn, this dynamic translated into sharp increase in inventory which impacted retailers must reduce through margin-destroying discounts. However, there are not many alternatives for the essentials, such as food and water. Therefore, DLTR looks attractive.

To be fair, Dollar Tree is considered a slightly overvalued investment at present, with investors paying more for profits than other companies in the defensive retail sector. However, in the face of either of two realities – ever-higher inflation or crippling deflation – DLTR should remain resilient. Again, people need the basics.

Moreover, its latest financial trajectory provides an encouraging backdrop. In its company’s quarter ended July 2022, Dollar Tree posted net income of $360 million. That tally represents a year-over-year increase of almost 28%. Additionally, the company’s diluted earnings per share on a rolling 12-month (TTM) basis is $6.97. This figure significantly exceeds the EPS of $5.83 posted in the fiscal year ending January 2022.

Is DLTR stock a buy, analysts say?

As far as Wall Street is concerned, DLTR stock has a moderate buy consensus rating based on seven buys, three holds and no sell ratings. The average price target for DLTR is $169.10, implying an upside potential of 23.8%.

General Dollar (NYSE: DG)

Another popular name among discount dollar store inventory, Dollar General offers more than 18,000 stores in 47 states. Similar to Dollar Tree, Texas has the most Dollar General stores with 1,742. However, Georgia comes in second with 1,021 stores, with Florida rounding out the top three again with 1,006.

Basically, Dollar General should benefit from millennial migration trends. Even before the post-pandemic new normal, many young people were moving from overpriced coastal metropolitan areas to more rural areas. Naturally, the wild price spikes of the COVID-19 cycle helped accelerate this trend. So Dollar General can be located where people will be, not necessarily where they are now.

Financially, DG offers a fairly valued investment compared to other dollar store stocks. This should be expected, given that the demand for DGs will likely increase as economic conditions become more difficult.

In addition, Dollar General presents excellent performance measures in its income statement. For example, its three-year revenue growth rate stands at 14.6%, ranking higher than 87% of its peers. Additionally, the company’s return on equity reached nearly 38%, well above the defensive retail industry’s median of 8.9%. This statistic indicates that Dollar General enjoys a high quality trading profile.

Is DG Stock a buy, according to analysts?

As far as Wall Street is concerned, DG stock has a consensus strong buy rating based on 11 buy, three hold and zero sell ratings. The DG’s average price target is $277.36, implying 17% upside potential.

Conclusion: a relatively easy choice to make

While it’s essential to stray from absolute predictions on Wall Street, the reality is that, on a relative scale, acquiring some discount dollar store stock stocks is an easy choice. Most likely, the US economy will face a “flation” problem, either inflation or deflation. Either way, consumers need to buy the essentials, and that’s really what makes DLTR and DG viable.

Disclosure

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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