11:48 AM EST, 12/06/2024 (MT Newswires) -- Dollar Tree ( DLTR ) and Dollar General ( DG ) earnings this week topped expectations, marking a small step in the right direction for the discount retailers after their stocks slumped this year following broad economic and self-inflicted woes, analysts said.

On Wednesday, Dollar Tree ( DLTR ) reported fiscal third-quarter adjusted earnings rose to $1.12 a share from 0.97 a year earlier, topping the consensus estimate of analysts polled by FactSet of $1.07. Revenue climbed to $7.57 billion from $7.31 billion with analysts forecasting $7.45 billion. Same-store net sales, a critical metric for retailers, increased 1.8% versus the consensus of 1.3%.

"Call it what it was: They beat expectations, but expectations have come down quite a bit," R5 Capital Chief Executive Officer Scott Mushkin said in an interview. "But I do think it was a constructive quarter. For a year, maybe two years or so, it's just been this tortured downward [trend], and this is the first time you can say, 'Hey, that was constructive and there are some good things going on.'"

On Thursday, Dollar General ( DG ) reported fiscal third-quarter earnings of $0.89 a share, down from $1.26 a year earlier and trailing the analyst consensus of $0.96, partly because of hurricane-related costs. Net sales rose to $10.18 billion from $9.69 billion, topping the consensus of $10.14 billion. Same-store sales rose 1.3% versus the consensus of 1%.

"For DG, this a show-me story in terms of: Can you turn around store operations? Can you start to not only generate top-line growth but also turn around the margin trajectory?" Bernstein analyst Zhihan Ma said in an interview. "People were like, 'Sure, they slightly beat their lower expectations, but we haven't quite seen that operational inflection point in terms of strong EBIT growth, EBIT margin expansion.' That's not really coming through, and, if anything, it's still declining."

Dollar Tree ( DLTR ) and Dollar General ( DG ) faced a myriad of issues in recent years, some shared and some unique to their respective operations. Both companies count on lower-income consumers to drive sales, and those customers were the most adversely impacted by the post-COVID rise in inflation.

"Clearly, the consumer in the lower-middled to lower-end income bracket has really had a hard time," Mushkin of R5 Capital said. "There's definitely been a component of macroeconomic factors that are hitting the dollar store space."

Both companies faced a backlash over store and warehouse conditions with customers complaining about long lines, cluttered aisles and out-of-stock items. Federal regulators ordered the discount chains to pay millions of dollars in fines over workplace health and safety violations.

Both retailers have recently shaken up their leadership. Dollar Tree ( DLTR ) CEO Rick Dreiling stepped down on Nov. 4, and the company said Wednesday Chief Financial Officer Jeff Davis plans to leave. Dollar General ( DG ) parted ways with CEO Jeff Owens last year.

Dollar Tree ( DLTR ) and Dollar General ( DG ) have unique business models for different customers seeking certain items, and they've each made decisions that have led to self-inflicted pain, analysts said.

Dollar General ( DG ) focuses almost exclusively on rural, low-income consumers seeking a more traditional grocery store experience, and Dollar Tree ( DLTR ) provides more discretionary items such as party decorations and home decor in suburban areas to a wider range of consumers, including middle- and upper-middle-income shoppers.

"This has been part of the problem with Dollar Tree ( DLTR ) because of that appeal to [higher-income consumers], you have to have certain store standards," Mushkin said. "They can't be old, tired and dirty, everything just piled up and out of stock. Wealthier consumers, they're OK with adequate because they know they're in a dollar store, but they don't want bad, they don't want ceilings leaking."

Adding to Dollar Tree's ( DLTR ) woes is its unit, Family Dollar, which is more of a rival to Dollar General ( DG ), though it tends to cater to lower-income consumers in urban areas. Family Dollar has weighed on Dollar Tree ( DLTR ) since its acquisition in 2015, and the parent announced plans to close 1,000 of the stores and is also exploring a sale of the unit.

"For Dollar Tree ( DLTR ), it's more of a Family Dollar overhang," Ma of Bernstein said. "There's still little they can do for the stock to significantly move upward at this point unless they announce a major deal on the Family Dollar side. Family Dollar has been losing money. If they can just get rid of Family Dollar for free, it's immediately accretive to Dollar Tree ( DLTR )."

Meanwhile, Dollar General ( DG ) has invested heavily in opening new stores, which has presented its own set of issues. It currently operates more than 20,000 stores across the country, about 4,000 more than Dollar Tree ( DLTR ).

"Their story is like, 'Yeah, it's a new store, but it's an absolute mess,'" Mushkin said. "It's a new store but inventory is piled up to the ceiling. Some of it is competition, but really it's growing too fast, and the distribution system is out of whack."

Dollar General ( DG ) said Thursday it expects to open 575 new stores this fiscal year, down from 730 in fiscal 2024 and 1,000 in 2023. It plans to remodel 2,000 stores fully and incrementally remodel an additional 2,250 stores through its Project Elevate initiative.

"Their store operations have really suffered over the last couple of years between the rollout of self-checkouts, between the excessive inventory they've hoarded in the discretionary category and, on top of that, the reduced labor hours back in the 2022-23 timeframe," Ma said. "As a result, it makes sense for them to say, 'Hey, let's take a step back and focus on the existing mature store base and improve operations so that people want to come back and shop again.'"

"The move was quite smart and should be well-received by investors," Ma said.

Price: 73.37, Change: +0.81, Percent Change: +1.12