The trend: Dollar and discount stores are gaining share as their reputations for low prices attract more middle- and high-income shoppers.

• 3 million more households shopped with Dollar Tree in Q3 than a year earlier, CEO Michael Creedon said. The majority—60%—of those incremental shoppers were from households with over $100,000 in annual income, while 30% came from middle-income households, and the remainder from households earning under $60,000.
• Dollar General gained market share in both consumable and nonconsumable categories in Q3, CEO Todd Vasos said. The company’s customer count rose during the quarter, with “disproportionate growth” from higher-income households.
• Five Below credited its 14% YoY increase in Q3 comparable sales—nearly twice what analysts expected—in part to an influx of new shoppers and higher spending across all household income cohorts.
• Discount and dollar stores were one of the few retail sectors to consistently grow foot traffic throughout the year, per Placer.ai.

With momentum on their side, all three retailers adjusted their FY outlooks.

• Dollar Tree boosted the low end of its FY net sales forecast by $50 million, while reducing the upper limit by the same amount. The retailer now expects same-store sales growth of between 5% and 5.5%, narrowing its prior outlook of 4% to 6%.
• Dollar General now expects net sales to increase between 4.7% and 4.9%, above its previous forecast of 4.3% to 4.8%. Same-store sales growth is projected at 2.5% to 2.7%, compared with its previous expectation of a 2.1% to 2.6% rise.
• Five Below’s upgraded forecast calls for 9.4% to 10.1% same-store sales growth, a significant increase from the 5% to 7% rise it previously outlined. It sees adjusted earnings per share of $5.71 to $5.89, a significant boost from prior guidance of $4.76 to $5.16.

Zoom in: The big question for dollar stores and discounters is whether they can sustain these gains—especially since a sizable portion of growth is coming from higher prices rather than increased traffic.

• Dollar Tree’s same-store growth in Q3 was entirely the result of an increase in average ticket, mainly owing to the expansion of its multiprice strategy. Shoppers’ willingness—or need—to pay more led to a 4.5% increase in ticket, which more than offset a 0.3% decline in traffic.
• While Five Below has been more successful at attracting customers to its stores thanks to a better product mix and in-store experience, it too is leaning more heavily on higher-priced items to boost sales and margins. Roughly 20% of its assortment is now priced above $5, with some items costing as much as $30.
• Dollar General noted that basket sizes were flat during the quarter despite higher average unit retail prices, as shoppers bought fewer items per trip. The company’s core low- and middle-income customer is “feeling stretched,” Vasos said, and “being very mindful of where she shops and what she shops for, making [trade-offs] at the shelf in many instances.”

The big picture: While current macroeconomic uncertainty is broadly working in discounters’ and dollar stores’ favor for now, continued growth is not a guarantee.

• Rising pressures on their core lower-income consumers could challenge discretionary sales—which Dollar Tree and Five Below rely on—and push shoppers to reduce basket sizes.
• Improving economic conditions could also reverse market share gains by reducing the need for more affluent shoppers to trade down.

To keep the momentum going, these retailers will need to:

• Improve the store experience. Increasing staffing and making sure that shelf prices correspond to products’ actual costs could go a long way toward strengthening customer loyalty.
• Enhance store appearance. Better in-store organization and stronger curb appeal could make locations more inviting.
• Invest in convenience. Partnerships with delivery platforms like DoorDash and Uber can help dollar stores and discounters attract new shoppers while satisfying consumers’ desire for fast delivery.