Tractor Supply and TJ Maxx with strong growth among discount stores

The big American discount/dollar stores have continued their robust growth after the slight growth lull they faced after the pandemic-induced growth had dissipated. Dollar General especially struggled with the high comparative numbers. During the second half of 2022, the company dialed up the growth back to double-digit numbers. During the first half of 2023, the growth has slowed back to low single digits.

The other big discount stores, TJ Maxx and Dollar Tree have faced slowing growth. TJ Maxx saw almost a similar growth dynamic as Dollar General. Dollar Tree, on the other hand, has grown more steadily (i.e. without major growth spurts).

Tractor Supply leading the challenge

Of the smaller challengers, Tractor Supply is the biggest. They have been able to maintain high single-digit growth since the end of the pandemic. With the continued growth streak, Tractor Supply is about to break the $15 billion sales threshold.

The growth is even more impressive as the company has improved its healthy margins (both Gross and EBIT margins). Currently, Tractor Supply has the second highest margins in the discount sector. Differently from Tractor Supply, Five Below has not been able to improve its margins notably. However, Five Below does keep growing with healthy double-digit numbers.

Both TJ Maxx and Dollar General have been forced to cut their margins significantly from the pandemic peaks. Dollar General has been unable to turn the margin decline back to growth.

The strong profitability of Tractor Supply (EBIT margin 13,4%) is partly explained by the low Sales and Administrative costs that the company has. The other aspect influencing the margins is that the assortment mix seemed more skewed toward lower-margin groceries for the Dollar stores.

Inventories turning back to more normal levels

The one big topic during the last years has been the worldwide inventory glut many non-food retailers have experienced.

Discount retailers were no exception. The small challengers (Ollie’s and Five Below) saw big variations in the inventory levels. TJ Maxx and Dollar Tree were able to push inventories to decline. Especially TJ Maxx has been able to cut the inventory levels back to more historical levels.

On the other hand, Dollar General has struggled to control the inventories. For the last 10 quarters, the company has seen inventories grow faster than the revenues. Thus, the inventory per sales ratio is significantly higher than the longer-term average for the company. This will be something that the company needs to address in order to become more efficient.