At a time when retailers were robbed of inventory, discount stores managed to thrive during the pandemic, and Dollar General (NYSE: DG) was no exception. Same-store sales for Dollar General rose 12.7% in the fourth fiscal quarter of 2020, exceeding analysts’ estimate of a 10.7% increase. Net income also rose about 20% to $642.7 million.
But despite coming off a strong quarter, Dollar General is projecting a decline in sales in the coming months. And that could leave real estate investors worried.
Will a reopening economy hurt discount stores?
Real estate investors are banking on an economic recovery to avoid losses. Right now, countless retailers and small businesses alike are at risk of closing due to the impact of the pandemic. If that happens, shopping centers and malls could face unprecedented vacancies -- and the REITs (real estate investment trusts) that own them could suffer a major drop in revenue.
But while a broad economic recovery would obviously be a good thing, it could actually hurt discount stores -- namely, by drawing business away from them. Shoppers have been notably budget-conscious over the past 13 months, and many have turned to discount stores to help them stock up on essential items on the cheap. But once economic and virus-related concerns start to wane, consumers may seek to change their habits and abandon discount stores in favor of higher-end retailers their new and improved paychecks can support.
Last month, Dollar General issued a warning that sales could decline in the near term as lower- and middle-income households start to spend their money elsewhere. That warning comes even in the wake of a recent round of $1,400 stimulus checks. The logic is that a more generous stimulus round could push consumers toward higher-priced stores and away from discount retailers.
Dollar General said it expects full-year same-store sales to fall 4% to 6% this year. It's also projecting that overall net sales will either be flat or 2% lower than they were last year.
A mixed bag for real estate investors
Discount stores helped sustain shopping centers during the pandemic, at a time when many retailers were either shuttering or falling behind on their rent. But if sales begin to decline at discount stores, it could pave the way to closures.
Still, those closures are unlikely to happen in the very near term. In fact, during the 52-week period ended January 29, Dollar General managed to open 1,000 new stores, remodel 1,670 stores, and relocate 110 stores.
The discount retailer also has big plans for 2021 -- namely, it's looking to open 1,050 new stores, remodel 1,750 stores, and relocate 100 stores. It also plans to introduce new store concepts that build on the Dollar General Plus (DGP) and Dollar General Traditional Plus (DGTP) format, which is larger than traditional Dollar General stores to accommodate more cold storage for grocery items.
As such, while declining sales projections don't exactly paint a pretty picture, real estate investors should take comfort in the fact that Dollar General only seems to be making plans to expand its footprint, not shrink it. And while consumers may have more shopping options once their paychecks increase and more jobs come back, many may opt to uphold their pandemic-driven habits and keep buying products from discount stores, where their money goes further. So there's a good chance Dollar General and its many budget counterparts will continue to pump much-needed revenue into shopping centers for the foreseeable future.