4 Reasons Behind the Monster Year for Dollar Store Stocks

Dollar store stocks have exploded this year. Here' why.
By Brian Sozzi ,

Due to several factors, the monster run in dollar store stocks this year may be just getting started.

Shares of the nation's biggest dollar store chains -- Dollar Tree (DLTR) - Get Report and Dollar General (DG) - Get Report -- have exploded to the tune of 24% and 29%, respectively, this year. The no-frills dollar stores have even seen better stock price performances than internet shopping juggernaut Amazon (AMZN) - Get Report , whose shares are about 9% year to date.

In addition to solid first-quarter results for the dollar stores luring in investors, hope for further gains are being fueled by multiple longer-term considerations.

"We believe industry fundamentals are improving on the basis of the following four factors such as rising employment, recent minimum wage increases, an improving consumer inflation outlook and ample room for dollar store share gains," pointed out BTIG analyst Alan Rifkin in a new note to clients on Tuesday. 

TheStreet takes a quick look at the driver's behind the sector's meteoric rise among investors in 2016, all of which may support further gains into the end of the year.

Dollar stores are now seen by many as sexy places to shop due to a focus on thrifty living. 

1. Rising Employment

Paychecks each week for lower-skilled workers amid the improvement in the U.S. labor market, more trips to the dollar stores it seems.

While the U.S. unemployment rate ticked up to 4.9% in June from 4.7% in May, the absolute number of people employed increased by 287,000 versus May to an all-time high of 144.2 million people, notes Rifkin.

Meanwhile, the number of people involuntarily working part-time for economic reasons (i.e., because they could not find full-time work) decreased by 587,000 workers, a 9% decrease from May. According to Rifkin, this is an improvement in a segment of the labor force that likely "overindexes" -- or greatly identifies with -- as dollar store shoppers.

More jobs and higher wages for lower income Americans are fueling dollar stores.

2. Higher Minimum Wages

Fatter paychecks for lower-income earners, perhaps more splurges while wandering the aisles of a dollar store.

Fourteen states increased their minimum wage on Jan. 1, covering a total of 4.6 million people. Four of those states, including California and Massachusetts, increased their minimum wage by $1 an hour, or 11%, says Rifkin. The minimum wage is set to rise to $15 an hour in California and New York by 2021. A $15 minimum wage, phased-in over a number of years, has also been passed by certain cities such as Seattle and Washington D.C.

Pointed out Rifkin, "Recent announcements by large corporations including JPMorgan Chase (JPM) - Get Report and Starbucks (SBUX) - Get Reportraising base pay for their workers is also raising incomes among people who are target dollar store customers." 

Starbucks is a holding in Jim Cramer's Action Alerts PLUS Charitable Trust Portfolio. Want to be alerted before Cramer buys or sells SBUXLearn more now.

Dollar General shares have outperformed Dollar Tree shares this year.

3. Deflation Helps

Inflation for key monthly expenditures for households appears to be under control -- and in some cases set to improve -- leaving more money in the pockets of consumers at the end of the month.

Gas prices have increased about 10% so far this year, though remain down 20% from the prior year. But, much of the recent savings from lower gas prices, says Rifkin, have been eaten up by rising rents, which is a larger consumer expense than gas as measured by the consumer price index (CPI). That dynamic could be about to change for the better.

"We believe rent inflation will slow from 5% in the first quarter to 3-4% over the course of the year," writes Rifkin, adding, "Occupancy rates ticked down to 95.7% in the first quarter from 95.9% at the end of 2015, according to MPF Research, and we expect continued looser conditions will help cool rent inflation as the year progresses."

Further, in the week after Britain's vote to leave the Eurozone, the interest rate on 30-year fixed mortgages fell to their lowest levels in more than three years. According to Rifkin, there could be a home refinance boom that reduces mortgage payments and frees up more disposable income for consumers.

Dollar stores plan to open tons of new stores in 2016.

4. Dollar Stores Have Room To Grow

Dollar stores are far from at saturation, according to Rifkin, and their likely continued aggressive expansion in the U.S. will help them wrestle market share from Walmart (WMT) - Get Report and other discounters. "With the ability to place another 13,000 locations nationwide, the industry is far from over-saturated, and will continue to take market share from other retail concepts, in our view," says Rifkin. 

Both Dollar General and Dollar Tree are already off to a mind-boggling start to opening new stores this year.

In the first quarter, Dollar General opened 249 stores, and plans to open 900 total in 2016. For 2017, the company intends to open 1,000 new stores. At Dollar Tree -- which is still digesting its purchase of one-time rival Family Dollar -- it opened 112 new Dollar Tree stores in the first quarter. Family Dollar opened 59 new locations. The company plans to open 350 new Dollar Tree stores and 200 Family Dollar locations this year.  

Loading ...