Dollar General and Dollar Tree Are Both Dollar Stores, but They're Actually Very Different. Here's What That Means for Investors.

At first sight, the two discount store chains appear similar enough. Sure, Dollar Tree's (NASDAQ: DLTR) distinguishing feature is a retail price point of $1.25 for at least most of its merchandise. It and Dollar General (NYSE: DG) are still both categorized as dollar stores, however, and certainly compete with one another for consumers' dollars.

These two companies are actually quite different from one another, though, so much so that their stocks aren't likely to move in tandem for the long haul. Here's what investors need to know.

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Image source: Getty Images.

Not the same

Dollar General is still the titan of the business, operating 20,594 total stores peppered across most of the United States. Some of those are more experimental stores called pOpshelf, but by and large these locales operate under the Dollar General banner. This company did $40.6 billion worth of business last year, selling goods at a typical range of price points you'd expect from a discounter.

Dollar Tree's structure is different. It's actually the combination of 8,881 Dollar Tree stores and 7,622 Family Dollar stores, although the entirety of the latter chain is soon going to be sold to a private equity outfit. While this sale will essentially cut Dollar Tree's physical footprint in half, the remainder may be better off with this severing. The pairing never achieved the synergies investors were hoping it would when it was first formed back in 2015. The two separate units ended up operating quite independently of one another, with the Family Dollar arm simply devolving into dead weight that couldn't quite compete with more than a little head-to-head rivalry like Dollar General, but also outfits like Ollie's and Big Lots.

Still, the Dollar Tree brand itself enjoys enough scale -- $17.6 billion in sales last fiscal year -- and enough presence so that its eventual smaller size won't prevent it from effectively competing with Dollar General.

Nevertheless, there are differences investors will want to keep in mind.

Comparing and contrasting Dollar General and Dollar Tree

Giving credit where it's due, consumer market research outfit Numerator dug up most of the data on the table below, while the two companies themselves supplied the rest. Take a look, noting that Numerator's numbers for Dollar Tree only apply to Dollar Tree, and do not reflect Family Dollar's presence in the marketplace. (Dollar Tree's sales mix data at the bottom of the table, however, comes from these two companies themselves, and does include Family Dollar's portion of Dollar Tree's total sales.)

Sales-mix data comes from each respective company. All other data provided by Numerator.

Much of this was already known, or at least broadly understood. Dollar General, for instance, has frequently touted the fact that roughly three-fourths of its stores are found in towns with populations of less than 20,000. According to Numerator, rural customers, despite shopping less often, contribute significantly due to higher spending per trip.

It's also arguable that Numerator's income breakdown understates just how many lower-income consumers depend on Dollar General. With above-average exposure to rural markets where incomes tend to be less than what they are in more urban settings, Dollar General's average customer lives in households with annual incomes believed to be right around the $40,000-per-year threshold Numerator is using at the low end of its middle range.

Perhaps the most eye-opening data point here, however, is how much consumables (food, cleaning supplies, etc.) Dollar General sells as opposed to Dollar Tree. More than 80% of Dollar General's sales are consumables, in fact, while a little less than half of Dollar Tree's are.

And remember, this sales-mix data includes Family Dollar's revenue, which presumably is more like Dollar General than not. Once Family Dollar's sales are taken out of the mix, look for Dollar Tree's sales mix to shift to an even greater proportion of discretionary goods.

Built to thrive in different environments

Great, but what does this mean for current and would-be investors of either stock?

It seems counterintuitive at first, but Dollar General's significant exposure to consumables is a problem when inflation lingers at relatively high levels, as it has since soared in 2021 and 2022. Not only does this pump up the retailer's costs on goods that already sport paper-thin margins, but in many cases struggling consumers simply stop making these purchases rather than shopping around for a cheaper alternative. As CEO Todd Vasos said last August following a disappointing Q2 report that preceded a cut to full-year guidance, "this lower-end consumer continues to be very much financially strapped, especially as it relates to her ability to feed her families and support her families." That message was reiterated in March this year.

The graphic below quantifies Vasos' qualitative assessment. Dollar General's same-store sales growth in 2022 is only the result of 2021's steep declines. This improvement withered in 2023, and has yet to be restored in earnest.

Data source: Dollar General Corp. Chart by author. (Note that the reason Dollar General's same-store sales soared in 2022 is only because the comparisons to 2021's poor numbers were so easy to improve.)

In contrast, Dollar Tree's discretionary business is arguably a competitive edge when inflation is chipping away at consumers' buying power.

This also initially seems counterintuitive. Think bigger-picture though. In a normal, decent economic environment, consumers might splurge modestly on décor, kitchenware, toys and the like with purchases at Walmart, Target, or Amazon. When forced to really pinch pennies though, these "splurges" increasingly happen at Dollar Tree at an affordable starting price point of $1.25.

In other words, Dollar Tree is the spending downgrade that Dollar General can't be.

The comparison below supports this argument. Not only have Dollar Tree's same-store sales consistently outgrown those of Dollar General since inflation was catapulted in 2021, Dollar Tree appears to have actually thrived when Dollar General couldn't specifically because of this lingering inflation.

Data source: Dollar General Corp. and Dollar Tree Inc. Chart by author. Note that Dollar Tree's same-store sales growth data does not include Family Dollar's same-store sales figures.

These two stocks aren't exactly interchangeable

The opposite situation will, of course, lead to the opposite outcome. That is to say, if and when inflation finally cools and rekindled economic strength takes hold -- improving household incomes even in rural areas -- that plays to Dollar General's strengths.

That wouldn't necessarily put Dollar Tree at a troubling disadvantage though, to be clear. Dollar Tree's greater exposure to more urban shoppers and at least slightly bigger household incomes keeps its business relatively steady. There will also always be at least some demand for an affordable "treasure hunt" that only Dollar Tree can offer.

Still, an improving economy would set the stage for a shift in the competitive dynamic between these two dollar store chains, which could ultimately make a difference in their underlying stocks' performances.

And that may be what the market's betting on happening sooner rather than later, in light of Dollar General stock's recent market-beating run-up.

In the meantime, Dollar Tree shares are underperforming at least partly due to its Family Dollar drama. Even if it will be shedding this problematic arm soon, it's disruptive. Some investors may also be sensing a brewing shift toward economic health despite fallout from newly imposed tariffs that Dollar Tree is far more vulnerable to than Dollar General.

If you don't think the U.S. economy is actually out of the woods yet though (particularly as it pertains to consumers' buying power), beaten-down Dollar Tree shares are still arguably your better bet. Dollar General's more modest exposure to higher tariff costs still isn't enough to offset its disadvantageous mix of shopper demographics and its heavy reliance on lower-margin consumables.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Target, and Walmart. The Motley Fool recommends Ollie's Bargain Outlet. The Motley Fool has a disclosure policy.