Like most retailers, dollar stores saw traffic plummet early in the pandemic, but in recent weeks major players Dollar General, Dollar Tree and Five Below have all staged a comeback.

At Dollar General, for example, foot traffic rose 8.6% year over year in the first week of November and 9.6% in the second, according to data from traffic analytics firm Placer.ai. Five Below's 93.4% year-over-year traffic plunge in April gave way to a 9.9% rise in October, the firm found. A relative laggard, footfall at Dollar Tree (which also runs Family Dollar) was down 3.4% year-over-year during October, but that still beats most other retailers, Placer.ai noted. 

The trend tees up a "potentially massive holiday season for the value segment," Placer.ai Vice President of Marketing Ethan Chernofsky said in a blog post.

Further evidence of that is found in the three retailers' third quarter performance, with some differences among them — but with strong indications that all are likely to prosper well into the future, even after the pandemic finally ends.

Dollar General

The star of the show is probably Dollar General, which posted gains from its grocery sales and discretionary items. The retailer did what few have done in the pandemic period: launched a new concept aimed at suburban women, Popshelf, featuring seasonal, home decor, beauty products, cleaning supplies and party goods.

In the third quarter, net sales rose 17.3% year over year to $8.2 billion, including positive contributions from new stores and comp growth, "modestly offset" by store closures. Same-store sales rose 12.2%, driven by higher average transaction amount, partially offset by a traffic decline, according to a company press release. Comps rose broadly across categories, including consumables, seasonal, home and apparel, with the largest percentage increase in home.

Gross profit as a percentage of net sales expanded 178 basis points to 31.3% from 29.5% in the year-ago period, thanks to a reduction in markdowns, higher initial markups on inventory purchases, a greater proportion of sales from non-consumables and a reduction in inventory shrink. Those were partially offset by increased distribution and transportation costs. That and consumer behavior have been affected by the pandemic, the company said. Finally, net income rose 57.1% to $574.3 million.

Dollar General attracts more customers beyond the low-income households that make up other dollar stores' base, and its reach among a diverse set of income and age demographics is growing, according to GlobalData research. The pandemic has aided Dollar General in a number of ways, including the trend of many people abandoning cities to the more rural areas where the retailer is mostly found, according to GlobalData Managing Director Neil Saunders.

"[N]one of these shifts show any sign of unwinding over the next quarter," Saunders said in emailed comments. "Indeed, if anything, a spike in coronavirus cases could elevate them still further and drive consumers back to stockpiling which would be favorable to Dollar General. As we look further ahead, while a vaccine could potentially reverse some of the shifts, we believe it will do so only slowly. And even then, Dollar General can still rely on heightened value consciousness and its continued store expansion to drive sales."

In the 39 weeks ended Oct. 30, Dollar General opened 780 new stores, remodeled 1,425 and relocated 76.

Five Below

Perhaps known best as a top purveyor of the fidget spinner and other hot items, Five Below has leveraged its ability to react to trends by increasing its offer in home, a category that has boomed with so many people staying away from offices and outside recreation.

The retailer's third quarter net sales rose 26.3% year over year to $476.6 million, with comparable sales up 12.8%. Net income increased 100.5% to $20.4 million from $10.2 million, as operating income rose 91.2% to $24.2 million, according to a company press release.

"Five Below's comp should stay solid and benefit from several initiatives and trends," Telsey Advisory Group analysts led by Joseph Feldman said in emailed comments. Those include its "remerchandised assortment, with a greater focus on essentials and work from home items," an in-store experience with more self-checkout and a redesigned front end, more e-commerce and online fulfillment options, and calendar benefits (an early Hanukkah, two extra selling days between Thanksgiving and Christmas, and Christmas on a Friday), Telsey said.

Like rivals, and like so few other retailers, Five Below is in brick-and-mortar expansion mode, with 36 new stores in the quarter, ending the period with 1,018 stores in 38 states — 13.9% more compared to a year ago, per the release.

Dollar Tree

The third quarter was a boon for Dollar Tree, though the company continues to grapple with running two businesses, its namesake and Family Dollar chains.

In the third quarter, consolidated net sales rose 7.5% year over year to $6.18 billion, according to a company press release. Same-store sales rose 5.1%, with comps at Family Dollar up 6.4% and at Dollar Tree up 4%. Gross profit rose 12.9% to $1.92 billion as gross margin expanded 150 basis points to 31.2%, driven by lower freight and shrink costs and reduced markdowns, partially offset by higher distribution costs that included $10.9 million in COVID-19-related payroll expenses.

Operating income in the quarter improved 29.9% to $465.5 million, with net income up 29% to $330 million. The sales and profit increases "show that the business continues to make progress and will emerge from the pandemic in good shape," though there's weakness at Family Dollar that contributed to a "modest slowdown in growth since the first two quarters," according to GlobalData's Saunders. That chain appears to be losing market share in consumables, while the Dollar Tree banner, where growth advanced from earlier in the year, is benefiting from a more diverse merchandise offer, Saunders said. And a customer base less affected by the pandemic.

"[W]e also believe that Family Dollar's customer base has also been harder hit by the lack of further government stimulus and the ending of enhanced unemployment benefits," Saunders said in emailed comments. "Even though they are still buying essentials, their capacity to spend on trade-ups and treats has been reduced."

Dollar Tree in the period opened 143 new stores, expanded or relocated 34 stores, and closed 16 stores, per its release. The company also said it completed 371 renovations to the Family Dollar H2 format.