May 25, 2016 / 6:42 PM / a year ago

Dollar stores' results may shelter battered retail shareholders

4 Min Read

A sign is seen outside a Dollar General store in Chicago, Illinois, U.S. May 23, 2016.Jim Young

SAN FRANCISCO (Reuters) - Investors shell-shocked by dismal quarterly reports from department stores will look for new signs of hope for brick-and-mortar retailers on Thursday as discount sellers Dollar General Corp (DG.N) and Dollar Tree Inc (DLTR.O) hand in their results.

Macy's (M.N), Nordstrom (JWN.N) and other department stores have been crippled by a consumer shift away from spending on apparel, and they have also been victims of Amazon.com's (AMZN.O) relentless expansion.

But strip mall retailers like Dollar Tree and rival Dollar General that sell ramen noodles, dish soap and toothpaste have been doing relatively well as a sluggish U.S. economy keeps many consumers living paycheck to paycheck.

While their products may sell at discounts, their stocks do not. Shares of Dollar General and Dollar Tree both recently traded at just under 20 times expected earnings, above their five-year averages, according to Thomson Reuters data.

On Wednesday, Dollar Tree's stock rose 1.3 percent while Dollar General added 0.9 percent. Options on each traded faster than normal and appeared to lean toward bets the stocks would rise, according to options analytics firm Trade Alert data.

Both companies have likely lost less business than department stores to Amazon than because their customers tend to make small, day-to-day purchases of staples and often cannot afford Amazon's $99-a-year Prime delivery membership, analysts say.

"They're in a very different place relative to the Macy's, Kohl's and Nordstroms of the world," BB&T analyst Anthony Chukumba said of the discount sellers. "While Macy's is closing stores, these guys are still opening stores."

Helped by the addition of around 8,000 shops last year through the acquisition of Family Dollar Stores, Dollar Tree is expected by analysts to post a 134 percent surge in revenue when it reports first-quarter results early on Thursday. Dollar General's revenue is seen increasing by 7.4 percent, according to Thomson Reuters data.

Following its Family Dollar acquisition, Dollar Tree aims to better compete against one-time leader Dollar General.

Dollar General's stock is up 17 percent in 2016, while Dollar Tree is up 2 percent.

By comparison, Macy's has dropped 9 percent year-to-date and Nordstrom is 24 percent lower.

Dollar General's earnings-per-share have exceeded expectations in all of the last four quarters, while Dollar Tree's EPS has missed estimates in three of the four last quarters.

Underscoring the relative health of retailers catering to lower-income customers, a better-than-expected quarterly report by Wal-Mart Stores (WMT.N) last week sent its shares 10 percent higher.

(In penultimate paragraph, corrects to show Dollar General's EPS exceeded expectations while Dollar Tree's EPS missed estimates, not that Dollar Tree's EPS exceeded expectations while Dollar General's EPS missed estimates)

Additional reporting by Saqib Ahmed in New York; Editing by Nick Zieminski

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