Dive Brief:

• Dollar Tree and Dollar General are running neck and neck in the dollar store segment, with Dollar Tree winning on margins and merchandise differentiation and Dollar General enjoying better credit metrics and same-store sales growth, according to a report emailed to Retail Dive from Moody's Investors Service analyst Mickey Chadha. Both companies have similar liquidity profiles, he said.

• Counting number of stores, Dollar Tree is the country's number one dollar retailer (14,744 as of October), compared to Dollar General  (14,321 as of November). But in terms of total revenue, Dollar Tree follows its rival with $21.5 billion, compared to $23.3 billion for Dollar General, according to the report.

• For a variety of reasons, e-commerce isn't much of a factor in the segment, and price sensitivity among less well-off shoppers will keep these retailers doing well in light of their three-point proposition of low prices, broad assortment and convenience, Moody's said.

Dive Insight:

Unlike mass merchants like Target and Walmart, dollar stores have for the most part shrugged off online sales, and the peculiarities of their consumer base will allow that to continue, Moody's said.

The shift to e-commerce has squeezed margins for a number of retailers, vividly demonstrated by Walmart in its most recent quarters. But things are different for dollar stores, for a variety of reasons, according to Moody's. "The target income demographic for dollar stores, in the context of their smaller store size and more convenient shopping locations, makes them relatively insulated from the online threat and gives them a competitive advantage over the discounters, since its stores are easier and faster to shop in," Chadha said.

Things didn't always look so even. A few years ago, Family Dollar had been losing market share to Dollar General, underperforming on both top-line growth and profitability, Chadha said. "By acquiring Family Dollar in 2015, Dollar Tree was able to head off a major competitive challenge from a strong operator and challenge Dollar General's dominance in its markets," he said.

The first year after the merger was tough, but it's now paying off, he said. Synergies now exceed $300 million, in line with Moody's expectations of the deal. The company has also improved Family Dollar's same-store sales growth, (positive the last two quarters of fiscal 2017, after declining in fiscal 2016). Dollar Tree has also reduced its substantial acquisition-related debt, which has helped Dollar Tree close the gap, according to Moody's.

But it's not just their own rivalry that the dollar store players have to worry about. Now, both Dollar Tree and Dollar General are well positioned to fight off competition from discounters like Aldi, Lidl and Walmart, which, research shows, have all taken steps to meet or beat each other's prices in various markets where they operate. The dollar stores are also helping themselves a lot by expanding their merchandise assortments, according to Chadha.

"With operating profit growth of 10% in 2017 and our expectations for 8% growth in 2018, the dollar store subsector continues to be one of the top performing subsectors out of the 14 subsectors that we follow," he said. "For context, our operating income growth forecast for the US retail industry is a comparatively smaller 3.5% to 4.5% for 2018."