INDUSTRY INSIGHT RETAIL INVENTORY UPDATED FEBRUARY 2020

DISCOUNT & DOLLAR STORES

CURRENT TRENDS PROJECTED VALUES Mass merchandisers’ growth continues with expected (12-MONTH OUTLOOK) holiday sales growth of 4.1% for 2019 Market expansion continues as most major dollar store chains opened new locations in 2019 DECREASING STABLE INCREASING As it matures as an industry, dollar and variety stores’ revenue is expected to grow at an annualized rate of 3.5% through 2024, primarily because of heightened competition

APPROXIMATE NET RECOVERY ON COST PER CAPITA DISPOSABLE INCOME AND ANNUAL GROWTH RATE

54,000 3.5%

52,000 3.0%

50,000 2.5% 75-90% 48,000 2.0% discount & dollar stores 46,000 1.5% 44,000 1.0%

42,000 0.5%

40,000 0.0% 2018 2019 2020 2021 2022 2023 2024 2025 2026

% Change $ Source: IBISWorld

DOLLAR STORES - TTM SALES (000’S)

Dollar General

Dollar Tree

Dollarama

Five Below

Ollie's Bargain Outlet

Variety Wholesalers, Inc.

$0 $5,000 $10,000 $15,000 $20,000 $25,000 $30,000

TY LY Source: Creditntell

NOTE: THIS PUBLICATION IS PROVIDED FOR INFORMATIONAL MARKETING PURPOSES ONLY. THE MATERIAL CONTAINED HEREIN SHOULD NOT BE REGARDED AS ADVICE, NOR RELIED UPON TO MAKE FINANCIAL, OPERATIONAL OR OTHER DECISIONS; NOR SHOULD IT BE USED AS A SUBSTITUTE FOR AN ASSET APPRAISAL. ACTUAL RECOVERY VALUES MAY VARY FROM TRANSACTION TO TRANSACTION AND THE RECOVERY VALUES REFERENCED HEREIN ARE FOR REPRESENTATIVE TRANSACTIONS WITHOUT REGARD TO SPECIFIC KEY FACTORS. THIS MATERIAL MAY BE REDISTRIBUTED ONLY IN ITS ENTIRETY, INCLUDING NOTICE OF COPYRIGHT. ALL RIGHTS RESERVED. ©2019 GORDON BROTHERS, LLC. GORDONBROTHERS.COM REFERENCE SOURCES: U.S. BUREAU OF ECONOMIC ANALYSIS, RETAIL DIVE, CREDITNTELL, IBISWORLD, +1.617.426.3233 DOLLARGENERAL.COM CONTINUED GROWTH FOR DOLLAR STORE SEGMENT: Store ECONOMIC CLIMATE DRIVES SALES: The target consumers of counts for the major dollar store chains expanded in 2019 dollar stores are typically budget minded and looking to take over 2018, as most chains increased their store counts advantage of the value-pricing model offered by discount while competing big-box formats slowed store growth in and dollar stores. Fiscal trends may predict discount and favor of digital growth. led the segment dollar store volume, and the segment is more apt to benefit with an increase of 867 stores for the 12-month period. It from economic downturns and higher jobless rates. The U.S. posted a comparable store sales increase of 4.6 percent for unemployment rate remained at historical lows in 2019, but the quarter ended November 1, 2019, and an eight-quarter increased slightly to 3.6 percent in January 2020 from 3.5 average increase of 3.5 percent. Most of Dollar General’s percent in December. direct competitors also posted positive same store sales averages for the eight-quarter period including Based on data from the Bureau of Economic Analysis, per- (+4.0 percent), Five Below (+3.6), Ollie’s Bargain Outlet capita disposable income is expected to increase at an (+2.3), and (+2.0). annualized rate of 1.9 percent through 2025. IBISWorld expects that dollar and variety stores’ industry revenue will U.S. retail sales for December 2019 increased 0.3 percent grow at an annualized rate of 3.5 percent over the same over November, in line with expectations. However, the period, including growth of 4.3 percent in 2020. increasing cost of gas, healthcare, and household rent expenses pushed the annual U.S. inflation rate to 2.3 Ongoing tariffs have taken a toll on retailers that import a percent (through December) up from 1.9 percent in significant quantity of lower priced products from China. 2018, adding pressure on discretionary spending, a key Since the tariffs were first implemented in 2018, many consideration for value-oriented shoppers. retailers have had to move to find alternative vendors or raise prices on products sourced from China in order to A six-day shorter holiday selling period resulted in maintain gross margins. It should be noted that, as part of disappointing holiday sales for some including Five Below, the phase-one China trade deal signed January 15, 2020, whose holiday comp sales were down 2.6 percent over 2018. the United States agreed to cut tariffs from 15 percent Total holiday sales however, increased 13.4 percent driven by to 7.5 percent on $120 billion of imports in exchange for a 20-percent increase in store count. Five Below noted that an agreement from China to purchase more American it is planning to implement a “Ten Below” concept in 2020 products. Additional tariffs of 25 percent on $250 billion to drive sales, expand product offerings, and increase gross of Chinese imports are still in place as of the date of this margins. publication.

Research from IBISWorld indicates that retailers in the To the extent that the unemployment rate rises, or the dollar and segment will continue to consolidate country faces future government shutdowns or other as competition intensifies from mass merchandisers and economic pressures, discount and dollar stores may benefit large superstores like Walmart, Target, and Costco. Another as they pick up opportunistic shoppers trying to make ends key area of competition is digital, where mass-market meet. retailers have invested heavily in recent years. Walmart’s e-commerce sales in the United States increased 41 percent for the third quarter of 2019.

To compete in these tough market conditions, IBISWorld projects that dollar stores will likely increase their market penetration and continue improving their efficiency, while smaller operators and non-chain stores will likely be unable to compete. As a result, store counts are projected to increase at a slower pace through 2024 than they did for the five years ending 2019.

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Bringing over 15 years of experience in the disposition and valuation of retail and consumer products, Becky Goldfarb oversees all aspects of retail asset valuations. Prior to that, Becky was responsible for the financial analysis of retail dispositions across all industry sectors. Read her full bio here GORDONBROTHERS.COM +1.617.426.3233