Dollar General sees more people in its stores, but they are buying less

By Tomi Kilgore

Stock reverses lower after downbeat margin outlook due promotional markdowns, as core customers continue to feel pressure

Shares of Dollar General Corp. did an about-face Thursday to trade sharply lower, after the discount retailer said price cuts, to try to entice its pressured core customer to spend, should hurt profitability for at least a couple more months.

While the company (DG) reported fiscal first-quarter profit, net sales and same-store sales that beat expectations for the fourth straight quarter, gross margin fell because of increased shrink, inventory markdowns and a higher percentage of sales of lower-margin private-brand products.

Chief Executive Todd Vasos said on the post-earnings call with analysts that weak sales in discretionary categories - stuff people want, rather than what they need - were a result of the "continued pressure our core customers feel" on their spending.

"They continue to be very value-oriented in their shopping behavior, which we see manifested in accelerated share growth in private brand sales as well as increased engagement with items at or below the $1 price point," Vasos said, according to an AlphaSense transcript.

The stock sank 5.8% in afternoon trading, to put it on track for the lowest close since Jan. 24. The selloff reversed an intraday gain of as much as 4.5% just after the opening bell, and a premarket gain of as much as 9.8% moments after earnings were reported.

Despite the streak of earnings beats, the stock has fallen on the day earnings were reported for the third straight quarter, and for ninth time in the past 10 quarters.

For the quarter to May 3, gross margin declined by 1.45 percentage points to 30.2%, due primarily to increases in shrink and markdowns and a greater sales mix of lower-margin consumables items.

Chief Financial Officer Kelly Dilts said on the post-earnings call that given that the core customer continues to be "very value driven," the pressure on margins from sales mix should continue to be above expectations.

"As such, we expect promotional markdown headwinds to gross margin will continue at least through the first half of the year," Dilts said.

On top of that, Dilts said that shrink, which has been the most significant headwind to its business, is trending worse than initially projected, and will be a greater headwind this year than planned for.

Despite this downbeat margin outlook, the company reiterated its full-year guidance range for earnings per share of $6.80 to $7.55, which surrounds the current FactSet consensus of $7.26.

For the first quarter, the company reported net income that fell to $363.3 million, or $1.65 a share, from $514.4 million, or $2.34 a share, in the same period a year ago. That beat the FactSet consensus for earnings per share of $1.58.

Net sales grew 6.1% to $9.91 billion, just above the FactSet consensus of $9.89 billion, helped by the opening of 197 new stores during the quarter.

Same-store sales, or sales from stores open at least 13 months, increased 2.4% to beat expectations of 1.7% growth, as an a 4% increase in consumer traffic helped offset a decline in average transactions amounts, as customers bought fewer items per basket.

The increase in sales was driven entirely by strength in the consumables category, which offset weakness in home, seasonal and apparel categories.

For fiscal 2024, the company affirmed its guidance ranges for net sales growth of 6% to 6.7% and for same-store sales growth of 2% to 2.7%.

The stock has now dropped 3.5% year to date, while Consumer Staples Select Sector SPDR ETF XLP has gained 5.9% and the S&P 500 index has advanced 10.3%.

-Tomi Kilgore

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05-30-24 1318ET

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