Sabrina Escobar
Privately held discount retailer 99 Cents Only Stores plans to shutter close to 400 stores as the company files for bankruptcy. That could be an unexpected windfall for rivals Dollar Tree and Dollar General, according to one analyst.
99 Cents Only filed for bankruptcy Sunday, according to court filings -- just a few days after announcing it was winding down its business operations. The Commerce, Calif.-based company, which operates discount stores across California, Texas, Arizona, and Nevada, plans to shutter all of its 371 locations.
The chain's customers and employees have bemoaned the closures across social media. But competitors Dollar Tree and Dollar General may be receiving the news with a hint of schadenfreude. The store closures present a "robust market share gaining opportunity" for both chains, notes Jefferies analyst Corey Tarlowe.
Dollar Tree could be the biggest beneficiary given its strong consumer overlap, and the proximity of its locations to 99 Cents Only stores, Tarlowe wrote in a Thursday note to clients. Roughly 57% of 99 Cents Only stores have a Dollar Tree within a one-mile radius, and 99% have a Dollar Tree within a five mile radius, the analyst estimates. In contrast, only 49% of 99 Cents Only stores had a Dollar General within five miles.
But don't count Dollar General out yet, he added. The company plans to open about 800 new stores in 2024, and given that it is "relatively underpenetrated" in the West Coast, there is a chance management takes advantage of the closures to expand its presence in the region. Indeed, big-picture, Tarlowe prefers Dollar General stock over Dollar Tree's, rating the former at Buy, and the latter at Neutral.
"Proximity and convenience are key tenets of our Buy-rated thesis, given about 75% of the U.S. population lives within five miles of a Dollar General," Tarlowe wrote.
To be sure, 99 Cents' closure illustrates the operational challenges dollar stores are facing in the current macroeconomic climate.
"The last several years have presented significant and lasting challenges in the retail environment, including the unprecedented impact of the Covid-19 pandemic, shifting consumer demand, rising levels of shrink, persistent inflationary pressures, and other macroeconomic headwinds, all of which have greatly hindered the Company's ability to operate," said 99 Cents interim CEO Mike Simoncic in a statement last week.
Lower-income consumers -- who make up the bulk of dollar-store customers -- have been particularly hard hit, especially after student-loan payments resumed, and several pandemic-era stimulus payments ended last year.
Neither Dollar General nor Dollar Tree are immune from economic volatility. In March, Dollar Tree said it planned to shut down hundreds of underperforming locations, while Dollar General issued dissapointing 2024 guidance.
Yet there has been a fledgling sense of optimism on Wall Street that things could be turning around. Per FactSet, 39% of analysts covering Dollar General stock have Buy ratings, up slightly from 36% at the end of October. The stock is up 14% this year, outperforming the S&P 500.
Dollar Tree stock, on the other hand, are down 8.5% this year, although more analysts -- 55% -- are bullish.
Write to Sabrina Escobar at sabrina.escobar@barrons.com
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(END) Dow Jones Newswires
April 11, 2024 14:20 ET (18:20 GMT)
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