Dollar General shares sink on second annual forecast cut, disappointing investors

By Savyata Mishra

(Reuters) -Dollar General’s shares slid about 13% on Thursday after it forecast a steep drop in annual profit and missed market expectations for second-quarter results due to weak customer traffic and a shift to lower-margin goods.

The Goodlettsville, Tennessee-based retailer has fallen short of average analyst forecasts for four straight quarters, cutting its full-year profit and sales targets on Thursday for the second time this year.

Its stock tracked a nearly three-and-a-half-year low, slumping as much as 18.2% to hit $128.96 – making it one of the worst performers on the S&P 500 index so far this year – as it battles bloated inventories and a shift in consumer spending patterns.

The quarter “marks the fourth consecutive guide down for Dollar General, which admittedly creates further uncertainty if we are hitting the bottom yet,” said Raymond James analyst Bobby Griffin.

“Our revised guide is really a function of the slower transactions that we’re seeing, and higher expected shrink,” CFO Kelly Dilts said on a call with analysts.

The discount retailer plans to clear excess non-consumables inventory and ramp up labor investments ahead of the crucial holiday season.

“We thought there was a risk that DG (the company) would need to invest more in stores than management initially expected, and reduce guidance as a result, but this is a much bigger cut than we (and the market) were expecting,” Citi analyst Paul Lejuez said.

Dollar General said its low-to-middle-income customer was seeking cheaper options as it remained “financially constrained”. “We do not expect positive store traffic until the fourth quarter,” Dilts said.

Evercore ISI analyst Michael Montani noted the company was wrestling for market share with Walmart and rival Dollar Tree.

Its gross profit as a percentage of net sales fell 126 basis points in the quarter as retail shrink – inventory lost to theft and damage – worsened. It flagged $100 million in additional shrink headwinds since its last analyst address in June.

Fiscal 2023 same-store sales are expected to range within a 1% decline to 1% growth, slower than analysts’ expectations of a 1.45% growth, according to Refinitiv IBES data.

Excluding items, profit-per-share will drop between 22% and 34%, steeper than a flat-to-8% decline range it forecast earlier.

Same-store sales for the quarter ended Aug. 4 fell while analysts had expected a 1.08% rise. It earned an adjusted $2.13 per share, also missing analysts’ estimates of $2.46.

(Reporting by Savyata Mishra in Bengaluru; Editing by Pooja Desai)