More investors are watching the shares of discount retailers like Dollar General Corp nd Dollar Tree Inc , which perform better during economic downturns, in the hopes of gauging changes in consumer behavior, though higher tariffs may erode the companies’ ability to act as economic bellwethers.
Fund managers and analysts say that they are looking for signs of a so-called “trade-down trade”, in which consumers forgo shopping at higher-end department stores or supermarkets in favor of the more limited selection but lower prices at deep discounters.
“The good news is consumers often shop more at the dollar stores during periods of economic weakness. We wouldn’t expect a sharp increase in sales, but we suspect sales will remain stable at the dollar stores while other companies may feel greater pain.
Earlier this month, Goldman Sachs said that the likelihood that the trade war between the U.S. and China leads to a recession are increasing and that it no longer expects a trade deal between the world’s two largest economies before the 2020 U.S. presidential election.
The spread between the yields of shorter- and longer-duration Treasury bonds slipped below zero earlier this year, a so-called yield curve inversion which has presaged recessions in the past.
A trade-down trade in the face of economic weakness could also benefit deep discount retailers such as Five Below IncNational Vision Holdings Inc and Ollie’s Bargain Outlet Holdings Incthat have solid balance sheets, noted Anthony Chukumba, managing director at Loop Capital Markets. Higher-end retailers like Best Buy Co Inc , meanwhile, would likely underperform, he said.
Dollar General, in particular, may continue to outperform due to its strong management team and inventory control, said Charles Grom, an analyst at Gordon Haskett Research Advisors.
Yet deep discounters like Dollar Tree and Dollar General are not immune from the economic impacts of the trade war between the U.S. and China. Dollar Tree.
“They may have to ‘break the buck’ and raise prices, but the risk there is that by doing so they could piss off a lot of people and not get them back,” he said./investing