Dollar General Sinks as Fizzling Sales Spur New Forecast Cut

Dollar General Corp., already on track for its first annual share decline, plunged again after slashing its profit forecast for the second straight quarter amid new signs that the discount retailer is losing ground to rivals.

(Bloomberg) — Dollar General Corp., already on track for its first annual share decline, plunged again after slashing its profit forecast for the second straight quarter amid new signs that the discount retailer is losing ground to rivals. 

Rising labor costs and efforts to tame inventory growth will crimp profit in the coming months, and annual earnings will tumble as much as 34% on a per-share basis, the discount retailer said Thursday as it reported financial results. Dollar General had previously said the measure wouldn’t fall more than 8%, while Wall Street had been projecting a drop of about 6%. 

The crumbling outlook piles new pressure on Dollar General, which has been reeling this year from rising economic strains on its lower-income customers and stepped-up competition from the likes of Dollar Tree Inc. and Walmart Inc. In the latest quarter, Dollar General’s comparable sales edged down 0.1%, while Dollar Tree’s and Walmart’s US operations reported gains of more than 6%. Grocery chains such as Kroger Co. have also been posting growth. 

“In effect, Dollar General is failing to keep pace with the market,” Neil Saunders, managing director at GlobalData, said in a note to clients. The drop in the retailer’s comparable sales, while modest, “is a long way below the average rate of growth in the grocery sector and is some ways below the current rate of inflation.” 

The shares fell 15% at 11:39 a.m. in New York, putting them on track for the lowest closing price since before the pandemic. Dollar General had already declined 36% this year through Wednesday.

The company, which for years dominated the dollar-store business and remains the largest US retailer by store count, said it was planning significant investments to improve the shopping experience. That’s a sign it’s responding to gains by rivals including Dollar Tree, where a former chief executive officer of Dollar General is leading a turnaround effort backed by activist investor Mantle Ridge. 

In addition, Walmart’s low prices and comprehensive online offerings have been scoring sales gains among higher-income shoppers. That’s probably blunting Dollar General’s ability to win business from new bargain-hunting customers, as it has in past times of rising stress on US consumers. 

JPMorgan Chase & Co. analyst Matthew Boss cited the competitive concerns as he downgraded the shares to neutral from overweight, saying Dollar General’s challenges amount to “more than macro.”

2024 Focus

To rekindle growth, Dollar General is planning to offer fresh produce at more stores and expand its offerings of health-care products, CEO Jeff Owen said on a call with analysts and investors. The Goodlettsville, Tennessee-based company is also redoubling its focus on rural stores, which make up the backbone of its business. 

Dollar General plans to spend more on labor and accelerate its inventory-reduction efforts — key steps given poor store conditions have fueled a string of workplace-safety fines by the US Labor Department. Dollar General said the extra spending and strategic actions would eat into operating profit by as much as $170 million in the second half of the year.

“While these investments will pressure our 2023 results, we believe they will further strengthen our foundation as we move into 2024 and focus on driving sustainable growth and creating long-term shareholder value,” Owen said. 

Dollar General maintained plans to open almost 1,000 stores this year on top of its existing count of more than 19,000 locations. 

Sales, bolstered by store openings, rose 3.9% to $9.8 billion in the fiscal second quarter, which ended in early August. Analysts had estimated $9.9 billion. Dollar General said customer traffic fell. 

Markdowns, Shrink

Headwinds during the second quarter included markdowns, inventory damage and increased shrink, which is a retail-industry term that includes theft. Indeed, the impact this year from shrink — a worsening problem for many US retailers — will be $100 million more than the company expected a quarter ago, Chief Financial Officer Kelly Dilts said. 

Total merchandise inventory climbed 8.7% from a year earlier, after a jump of 20% in the previous quarter, signaling that Dollar General is bringing the increase under control. 

Owen said Dollar General is providing support, counseling and resources to its employees after an Aug. 26 shooting at a Dollar General store in Florida, in which a 21-year-old White gunman killed three Black people. Authorities said the shooting was racially motivated, and Owen called it a “senseless and hate-filled act of violence.”

(Updates with JPMorgan downgrade in eighth paragraph)

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