Speaker 1: There are over $36,000 stores across the U.S. That's more than one store for every 10,000 people. These companies have long been Wall Street darlings.

Speaker 2: During the Great Recession in 2009, 2010, both Dollar General and Dollar Tree were two of the best performing stocks in the S&P 500 in those two

Speaker 1: years. The share price for Dollar Tree and Dollar General, the two biggest players in the space, far outpaced the S&P 500, jumping over 1,500 percent between 2008 and 2022. But over the past two years, the stocks of both companies have plummeted and the outlook, at least in the near term, isn't showing promising signs of

Speaker 3: recovery. We had this this pretty good growth over a period of decades, but in the last decade, we've added about 50 percent more stores and that's brought a number of challenges.

Speaker 4: Dollar General and Dollar Tree have both cut guidance recently, which set off alarm bells for investors.

Speaker 1: So what's happened to dollar stores and what do these companies need to do to get back on track? Dollar General, Dollar Tree and Family Dollar are the three largest brands in the space. Dollar Tree owns both Family Dollar and its namesake brand. In fiscal 2023, the two companies brought in nearly 70 billion dollars in combined revenue. All three brands have thousands of stores across the country, but target very different areas and demographics. Dollar Tree sells a lot of seasonal and discretionary items. Think wrapping paper and toys, typically in suburban strip malls. The Family Dollar chain, which the company acquired in 2015 for nine billion dollars, is generally found in more urban areas. Meanwhile, Dollar General focuses on a primarily rural customer base.

Speaker 3: The roots of dollar stores were in rural America, outer suburbs of metro markets. It was sort of the places where there wasn't sort of a big established value retail presence.

Speaker 1: A key thing to understand about dollar stores is that their main goal is to be an affordable place to shop with whatever set budget you have, not necessarily the best value for your money. For example, this box of 15 dryer sheets is a dollar twenty five. It's a better quote unquote deal to go up the road to Target and get a box of 240 of them for ten dollars. But if ten dollars is your entire budget for the trip to the store, it makes more sense to go to the dollar store. On the outside, these types of stores may not look so bad. From 2019 to 2023, sales have increased by about 30 percent for Dollar Tree and about 40 percent for Dollar General. In the same time period, these companies have added over 5,000 stores. New stores will naturally increase revenues, but that can mask slow sales growth at existing locations.

Speaker 2: The companies can say, you know, well, we're still growing revenues nicely. Both companies are saying they're taking market share. And these are all true statements. But when you really drill down to where you're taking share, like at a per store basis, and that's where you would suggest that perhaps they aren't that they're losing some share.

Speaker 1: High inflationary times disproportionately affect lower income consumers. Dollar General's core customer base, which is households earning less than $35,000 per year, contribute to about 60 percent of its overall sales.

Speaker 4: We're in a strange time where the jobs market is still relatively strong. And that means middle and upper income households don't feel that same level of pressure to turn to a different store or to shop dramatically different than their everyday habits. At the same time, the core customer, those lower income customers that rely on dollar stores, are getting even more selective and are tending to buy needs versus wants, things like food that just tend to be lower margin.

Speaker 1: Lower margin means they're less profitable, but food and household items have become increasingly important to the dollar store customer. In its 2024 second quarter earnings call, Dollar General said it's decreased its non-consumable inventory by 13 percent versus last year. The effect of inflation is also apparent at Dollar Tree stores, whose long differentiated strategy was a storewide $1 price point. In 2021, that changed.

Speaker 2: Even if you just take a step back and you think about sort of the magic around a retail box where everything is a dollar, and if you have eight items in your basket, it's going to cost you $8. And now you move to $1.25, it reduces some of that magic overall. And it sounds silly, but it confuses the shopping experience, makes it a little more complex.

Speaker 1: Some of the dollar store's lackluster financial results can be pointed to the conditions of its physical stores.

Speaker 2: It's just a less desirable place to shop. I mean, the whole idea is the dollar stores are convenient, but if you go there and there's only one cash register open and there's eight people in line, it takes 10 to 15 minutes to check out that you're losing your convenience angle. Or sometimes there's boxes in the aisles, you can't even get down the aisle because it's blocked.

Speaker 1: So my stock room is literally overflowed and look like this. So tell me, does your Dollar General look like this?

Speaker 4: Customers notice when a company is not minding the store. They see that there are boxes that are cluttering aisles. They notice that the item they want is out of stock. And so they may decide to go elsewhere. And Dollar Tree and Dollar General have been having execution problems that have contributed to a tougher economic backdrop.

Speaker 1: Inventory challenges were especially apparent during the pandemic. These smaller sized, more affordable products normally found at dollar stores were deprioritized by manufacturers.

Speaker 5: Customers that were then going into the stores, even if they found a store that was operational in the UK, the store was now very different and didn't have some of the items that were the reason that they went to the discount

Speaker 1: channel in the first place. Understaffing also became more apparent. The dollar store playbook has historically operated on a lean labor model that has long created problems for both companies. But during the pandemic, those issues were exacerbated.

Speaker 5: When COVID hit and the government was paying our subsidies and that the situation where lots of employees just opted out, didn't go to work, they didn't eat. And so then you got into this situation where, you know, the stores started to fall over.

Speaker 1: Dollar General and Dollar Tree have also faced numerous worker safety violations in their stores over the past decade. In the beginning of 2024, Family Dollar was fined over 41 million dollars for rodent infested warehouses. Family Dollar has been a burden for the Dollar Tree brand ever since its acquisition back in 2015.

Speaker 3: It was really supposed to be sort of the dollar general fighter. The challenge was that Family Dollar had always been the weakest of the dollar stores. It was never as profitable. It never grew as much. And because the management of Family Dollar knew that it was going to be sold, they stopped investing in lots of things.

Speaker 2: So even today, I mean, you're seeing, you know, outdated technology systems, outdated distribution centers, DCs that don't have air conditioning, HVAC systems at stores that are falling apart. So these are long legacy issues that Dollar Tree just didn't make the proper investments in despite now, you know, their ninth year of

Speaker 1: ownership. Family Dollar is the only one of the three brands that has seen a decline in foot traffic from 2019 to 2024. And now Dollar Tree wants to get rid of it. But aside from the internal struggles that these companies are grappling with, Walmart has also become a major problem for them.

Speaker 2: When you go back to the Great Recession and the dollar stores were doing well, Walmart was not putting up strong same-store sales growth. I think that's where there was trading away from Walmart and moving more to the dollar stores. The opposite seems to be happening today, where Walmart is putting up terrific same-store sales growth. They're gaining share of that lower middle income wallet and they're bringing in newer middle and upper income consumers.

Speaker 3: Walmart is keenly aware of how good these dollar stores have been for a long time and have learned a lot from them as well.

Speaker 1: Ninety percent of Americans live within 10 miles of a Walmart store. To put the impact of Walmart into context, the retail giant increased its U.S. sales by about four and a half billion dollars in its most recent quarter. That's about 4 percent higher than the year prior. It's also about half the amount of Dollar General's total sales last quarter and about 60 percent of Dollar Tree's total sales. A big part of the retail giant's recent success is due to its investment in e-commerce.

Speaker 2: A lot of legacy brick and mortar companies like Walmart, Home Depot, Best Buy, I like to say they made about five years of e-com and digital investments in about 12 to 18 months during COVID. So the digital capabilities of a lot of companies have also gotten a lot better in recent years.

Speaker 4: Dollar stores, because of the investments you have to make to pull off a larger online business, have not been able to move as quickly in those

Speaker 1: ways. Dollar General says that the middle and upper income consumers have become more engaged in e-commerce and those customers may not be trading down to dollar stores like they used to. Beyond e-commerce, another consideration is dollar stores' heavy investment in its grocery offering. At the same time, discount grocery companies like the European chain Aldi are growing rapidly in the U.S. Its location count has increased by about 1,000 stores over the past decade.

Speaker 3: I think Aldi and Lidl are a lot more important than the financial media tends to think they are because they're privately owned and they're small stores and they don't have the profile that Walmart or Amazon has. But there are thousands of Aldi's and those are almost always in the same markets that the dollar stores are.

Speaker 1: Even as inflation normalizes, dollar stores are not well-positioned to

Speaker 2: benefit. We have lower interest rates and the consumer is badder next year. Consumers will be buying more discretionary type of goods. So maybe the fundamentals could get a little bit better for the dollar stores with consumer spending, but we'll see other retailers outperform because they're more exposed to the discretionary merchandise.

Speaker 1: Look at the merchandise breakdown for the three major dollar store brands. Dollar General and Family Dollar are both about 80 percent consumable items. Dollar Tree has far more discretionary products. President-elect Donald Trump ran his campaign pushing for higher tariffs on goods imported from China. That will affect Dollar Tree especially as the chain imports over 40 percent of its merchandise, mostly from China. That's much higher than its other brand, Family Dollar, and its competitor, Dollar General. Plus, its fixed price $1.25 model means margins would be squeezed even tighter. The chain is focused on introducing more multi-priced items to increase spending at its stores.

Speaker 2: That core Dollar Tree model has a really nice niche. Everything's $1.25, so you get smaller pack items, you get special deals from suppliers. You start selling branded items at $2, $3, $4, so those are the same items that are at grocery stores or at Walmart. And so maybe a sales lift, but also maybe longer term competition.

Speaker 1: The minimum salary threshold to qualify for overtime pay is set to increase on January 1st, 2025.

Speaker 2: The dollar store managers, the small box, oftentimes in rural, lower cost of living locations, oftentimes make less than $59,000 on a salary basis. So if this rule change goes through, it would cause expense pressure on the dollar store for both banners.

Speaker 1: Another consideration for future success is leadership. Dollar General's CEO is on his second stint running the company. Dollar Tree's CEO announced he was stepping down at the start of November 2024. A Dollar Tree spokesperson told CNBC, Dollar Tree and Family Dollar play a vital role in providing high quality, low priced items that help our shoppers do more for less. With new leadership, we are continuing on our journey to transform the business and position ourselves as a leader in the workplace and associate safety through meaningful investments. Dollar General declined CNBC's request for an interview or comment. With succession planning and economic uncertainty a question mark for both companies, it's increasingly clear that getting dollar store businesses back on track is going to require a multifaceted approach.

Speaker 4: Dollar stores are contending with a mix of self-inflicted problems and also problems that they're contending with because the macro economic environment is just a lot tougher. You know, people who shop at dollar stores tend to have less income and so they are going to feel every push and pull of the economy. But at the same time, these retailers have to get their stores back in line and to draw back shoppers and build more loyalty, they need to mind the store.