Dive Brief:

• Dollar General reported Thursday that first-quarter net sales increased 8.3% year over year to $6.6 billion, as same-store sales were up 3.8%, according to a press release. The deep discounter's operating profit increased 4.5%, and net income increased 5.5% to $385 million.
• Dollar General rival Dollar Tree's net sales increased 4.6% year over year to $5.8 billion, with total same-store sales up 2.2%. Broken down, the Dollar Tree banner store comps increased 2.5% while Family Dollar comps went up 1.9%. Operating income fell nearly 12% to $385.5 million, but net income increased by over $100 million, to $267.9 million, thanks primarily to a year-over-year decrease in interest expenses.
• Dollar Tree said in a press release that it plans to shift 200 Family Dollar stores to the Dollar Tree brand during fiscal 2019 along with closing up to 390 underperforming stores, well above the 75 the discounter typically closes in a year as part of its footprint review. It is also testing merchandise set at price points above $1, a departure from its "everything's a dollar" model. Dollar Tree is also adding alcohol to 1,000 struggling Family Dollar stores. 

Dive Insight:

Both dollar-store retailers reported relatively strong Q1 numbers and improved performance over Q4. Dollar General, which in Q4 reported a decrease in margins and profits during a quarter of high discounting, "put any lingering concerns from its Q4 disappointment to rest with a strong start to 2019," Wells Fargo analysts led by Edward Kelly said in an emailed client note.

GlobalData Retail Managing Director Neal Saunders said of Dollar Tree, "After stumbling last quarter, Dollar Tree is back on track with a more robust set of numbers." Helping the retailer are its refurbished stores, expansion of its freezer section, store reduction and banner changes (from Family Dollar to Dollar Tree) at some stores.

Giving rival Dollar General a boost, Saunders said in emailed comments, is its deepening reach with different demographic and income groups, as well as "more points of interest," such as homewares, "occasion products" and produce.

Dollar General is shaking up its merchandising strategy by reallocating space to include more grocery items like fresh and frozen foods and reducing the inventory of items like apparel. In an earnings call Thursday morning, Dollar General's CEO Todd Vasos said initiatives that have gained the most momentum and progress include consumables, which result in increased foot traffic, higher sales and higher gross margin.

These initiatives include its DG Fresh strategy introduced last quarter, which allows the retailer to self-distribute frozen, dairy and deli products. With DG Fresh, the retailer is serving more than 800 stores in the Northeast. DG Fresh allows Dollar General to reduce product costs and improve gross margins over time. DG Fresh doesn't currently work with produce, but Vasos says it could in the near future. The retailer also announced plans to expand DG Fresh to 5,000 stores and open five total facilities by the end of fiscal 2019. 

Looming over both companies, and much of the retail world, are tariffs. A fourth round of duty increases recently proposed by the Trump Administration could have broad impacts on the industry. Neither dollar retailer included the potential 25% duties, which would cover many of the remaining imports from China, in their estimates for their yearly sales and profit numbers. Which means if they go into effect, their projections may have to change.

However, Dollar General CFO John Garratt noted in its earnings call that the retailer has made many efforts in reducing effects from tariffs including product substitution and product of origin diversification, but said customers may still face higher prices in fiscal 2019. 

Saunders, who also noted concerns about the impact of tariffs on Dollar General, said of Dollar Tree that "the impact of tariffs is also likely to weigh down on performance, even if the company has put in place plans to mitigate some of the cost increase."

One concern, Saunders added, is that tariffs would weigh heavily on the low-income shoppers that are Dollar Tree's core customer. Another concern is that Dollar Tree's "one-dimensional" $1 pricing model could constrain its ability to maintain profits (i.e., by passing tariff costs on to customers), Saunders added. He noted, though, that the company's "Dollar Tree Plus!", which is testing new price points, could give the retailer flexibility.