Dollar-store stocks slide and UBS says Chinese discount websites may be their next challenge

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Shares of Dollar General Corp. and its smaller rival Dollar Tree Inc. were lower Tuesday in a continuation of the trend seen since they reported weaker-than-expected second-quarter earnings.

Dollar General’s stock
DG,
+0.69%

has fallen for the last seven straight days for a cumulative decline of 11.5%. The stock is on track to close at its lowest level since March 14, 2019, according to Dow Jones Market Data.

Dollar Tree
DLTR,
-0.01%

has fallen 23.2% in the third quarter and is on pace for its worst quarter since the fourth quarter of 2007, before the financial crisis hit.

The two discounters should be doing well in the current uncertain climate. Instead, they have struggled along with their stocks as consumers hit by high inflation have become careful about how they spend money and are shopping at more stores and more frequently to seek out bargains.

Dollar General Chief Executive Jeff Owen said his company made targeted price reductions on certain key items in the second quarter to provide more affordable solutions for its customers.

“We have been pleased with the customer response both in terms of basket size and composition when the basket includes one of these items,” he said.

For more, read: Dollar General’s stock tumbles after retailer misses earnings estimates and lowers guidance

Dollar Tree’s second quarter was hurt by elevated “shrink,” which can refer to damaged items but has been used to mean a spike in shoplifting. Many retailers have complained about the problem, which they say is being conducted by organized gangs.

See: Walmart’s ‘shrink’ challenges differ from those of other retail giants, CEO says

Related: Target facing ‘unacceptable amount’ of retail theft and organized retail crime, CEO says

The company’s earnings were sharply lower than in the year-earlier period, and gross margins fell by more than 200 basis points.

UBS analysts highlighted another potential challenge facing hardline retailers in the U.S. on Tuesday, namely the threat from Chinese players Temu, Shein and even TikTok.

These overseas discount e-commerce players have entered the U.S. retail market and, “they are growing fast and gaining awareness,” said analysts led by Michael Lasser.

“While these players offer compelling prices on a wide selection of general merchandise, they have inconsistent customer experiences. Besides,
retailers like Walmart
WMT,
-0.17%
,
Target
TGT,
+0.79%
,
Dollar Tree, and Dollar General heavily index to consumables as a means to drive traffic,” said the note.

The analysts concluded that the perception of risk is greater than the reality, at least for now.

But the emerging players offer “a very enticing value proposition,” said the note. Temu and Shein in particular are very competitive in fast fashion and apparel, and offer products that are priced way below their brick-and-mortar counterparts.

They offer a fun and differentiated experience and have an outsized social media presence. An August poll conducted by UBS and Numerator found 83% awareness of Temu and 74% awareness of Shein.

“Still, fewer consumers have actually shopped at these retailers, with 34% of the respondents having made a purchase at Temu, 41% at Shein, and 8% at Miniso. Furthermore, the average transaction tends to be modest with only 23% of consumers spending over $50 per trip at Shein, compared to 17% and 7% for Temu and Miniso, respectively,” the analysts wrote.

The survey found that consumers are most likely to shift spending away from Walmart and Target, followed by Dollar Tree, Family Dollar and Five Below . Whether that proves to be a temporary trial depends on how satisfactory the experience is.

For now, the Chinese players’ long delivery times remain a hurdle, making it more likely that consumers purchase from them infrequently and not during busy holiday periods.

Still, collectively if emerging players succeed in taking 50 basis points of U.S. retail sales, that would amount to $33 billion by 2025, up from an estimated $10 billion to $15 billion currently. For comparison, Amazon’s
AMZN,
-2.02%

North America sales for 2023 are expected to come to about $350 billion.

Read also: Retailers compete to be first to hold holiday sales in a bid to spur flagging demand

“Ultimately, as e-commerce penetration rises in the US, we believe it will lead to a further rationalization of physical stores. Our analysis shows that this will likely translate to 50k store closures. This means that the risk from the emerging players will probably be more disruptive to less well-positioned traditional incumbents, such as mall-based retailers,” said the note.

The Consumer Staples Select Sector SPDR exchange-traded fund 
XLP
 has fallen 4.6% in the year to date, while the SPDR S&P Retail ETF
XRT
 has gained 0.5%. The S&P 500
SPX
 has gained 16%.

Read now: Greedflation is not letting up. Here’s what companies are saying about it.

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