Dive Brief:

• Discount retailer Dollar General’s shares dropped 32% Thursday as it slashed its financial outlook amid softening consumer spending and increasing costs.
• The Goodlettsville, Tennessee-based company revised downward its financial guidance from its May forecast, with net sales growth for fiscal year 2024 now expected between 4.7% to 5.3%, compared to its previous expectation of approximately 6.0% to 6.7% and same-store sales growth between 1.0% to 1.6%, compared to the company’s previous expectation in the range of 2.0% to 2.7%. 
• “The customer will continue to feel financial pressure for the duration of the year, and the promotional environment will remain elevated beyond what we had initially anticipated,” CFO Kelly Dilts, said on the company’s Q2 earnings call. “We expect additional pressure as a result of increased promotional markdown activity…as well as increased sales mix pressure due to the customer’s need to prioritize their spending on the consumables category.”

Dive Insight:

On Thursday, Dollar General reported Q2 net income of $374.2 million, or 20.2% less compared with $468.8 million in the year-earlier period. The company saw gross profit as a percentage of net sales at 30.0% in the second quarter compared with 31.1% in the year-earlier period, which it attributed to “increased markdowns, increased inventory damages, a greater proportion of sales coming from the consumables category, and increased shrink,” the release said.

Dilts singled out three pressures straining margins, including shrink or inventory loss, which it expects to be a headwind for the rest of the year; elevated maintenance expenses, particularly with HVAC units and coolers during the summer months; and wage rate inflation close to around 4% this year — higher than what the company anticipated in earlier guidance for the year.

Despite these challenges, Dilts said she is “cautiously optimistic” that shrink will turn a tailwind in the fourth quarter as inventory reduction plans take shape. The company plans to make investments in markdowns to drive sales and “be there for the customer,” Dilts said. The markdown rate for the back half of this year is expected to be similar to last year.

Merchandise inventories were worth $7 billion at the end of the second quarter, 7% less than the prior year and a decrease of 11% on a per-store basis. Meanwhile, non-consumable inventory dropped 13% year over year and decreased 17% on a per-store basis, according to Dilts.

“We will continue to focus on maintaining the appropriate balance of [the] mix of inventory to drive sales while also mitigating shrink risk and improving our working capital,” she said.

The company’s CEO Todd Vasos said the shift to staffed checkouts is resonating with customers and having a positive effect on the company’s shrink levels.

“The reduction takeaway of the self checkouts and moving those to assistant lanes is in full swing. Our customers are telling us they like it a lot more …they like the interaction instead of having to check out themselves,” he said. 

Courting the price-conscious consumer

A key challenge for Dollar General is continuing to reach consumers facing inflationary pressures that are changing their buying behaviors.

“The core consumer is very price-sensitive at this time in looking for value wherever she can find,”  Vasos said. The core consumers at Dollar General — making up 60% of its customer base —  come from households that earn less than $35,000 annually, Vasos said.

“Inflation has continued to negatively impact these households, with more than 60% claiming they have had to sacrifice on purchasing basic necessities due to the higher cost of those items, in addition to paying more for expenses such as rent, utilities and health care. More of our customers report that they are now resorting to using credit cards for basic household needs, and approximately 30% have at least one credit card that has reached its limit,” he said.

Dollar General’s lackluster performance comes as other retailers showed strength this quarter: Target shifted back to growth in the second quarter with sales rising 2.6% to $25 billion, up from $24.4 billion a year earlier, beating expectations; and Walmart’s second quarter consolidated revenue rose 4.8% year over year to $169.3 billion.

Vasos, in fact, acknowledged Walmart’s strength in the discount retail sphere, saying “the guys down in Bentonville [Walmart’s headquarters] are doing a pretty nice job in garnering the available traffic that's out there from other retailers.”

A report from investment bank Jefferies published Thursday acknowledged Dollar General’s execution challenges.

“Dollar General has dealt with a number of near-term headwinds that have affected sales and profitability in the interim and thus are weighing on shares. We see long-term upside ahead, but near-term execution needs to improve, with investments in inventory management and labor bearing fruit in the financials,” the report said.