Dollar General's stock set for record drop as core customers 'feel worse off'

By Tomi Kilgore

Profit, net sales and same-store sales all missed expectations, and the full-year outlook was slashed

Shares of Dollar General Corp. were plunging toward their worst day ever in early Thursday trading, after the discount retailer reported fiscal second-quarter profit and sales that missed expectations and slashed its full-year outlook, which the company said was partially because its core customer remained "financially constrained."

While same-store sales, or sales of stores open at least 13 months, showed growth, as higher traffic in stores offset lower transaction amounts, the growth was driven entirely by the consumables category, which includes food. Meanwhile, sales of seasonal, home and apparel categories products declined.

As Chief Executive Todd Vasos said on the post-earnings call with analysts, that means customers are still focusing their spending on items they need, rather than want.

The stock (DG) plummeted 28.1% in morning trading toward the lowest close since May 31, 2018. The stock was also headed for a record one-day decline, as the current record on a closing basis is the 19.5% plunge on June 1, 2023. The company went public in November 2009.

That selloff was hurting the stock of rival Dollar Tree Inc. (DLTR), which slumped 8.9%. Dollar Tree is scheduled to release its earnings report on Sept. 4.

Vasos pointed to other data showing that Dollar General's core customer, who contributes about 60% of total sales and comes predominantly from households earnings less than $35,000 a year, continue to have trouble managing their budgets.

"Notably, the three softest [same-store] sales weeks of the quarter were the last week of each of the calendar months," Vasos said, according to a FactSet transcript. "This pattern suggests that our customers are less able to stretch their budgets through the end of the month."

He added that a most of the company's customers say they "feel worse off financially" than they did six months ago, as inflation, a softer job market and increased borrowing costs have especially weighed on lower-income consumer sentiment.

And in the latest survey, about 30% of the company's customers have maxed out on at least one credit card, and 25% said they expect to miss a bill payment in the next six months.

"While middle and higher income households are seeking value as well, they don't claim to feel the same level of pressure as low income household," Vasos said.

Earlier Thursday, the company reported net income for the quarter to Aug. 2 fell to $374.2 million, or $1.70 a share, from $468.8 million, or $2.13 a share, in the same period a year ago. That missed the FactSet consensus for earnings per share of $1.79.

Net sales grew 4.2% to $10.21 billion, below the FactSet consensus of $10.37 billion.

Same-store sales, or sales of stores open at least 13 months, rose 0.5% as a 1% increase in customer traffic offset a 0.5% decrease in the average transaction amount, but that came up short of the FactSet consensus for a 2.3% rise.

The triple-miss earnings report for Dollar General snapped a four-quarter streak in which EPS, net sales and same-store sales had all beat expectations.

"As customers have felt more pressure on their spending, we have also seen corresponding elevation in the promotional environment beyond what we have anticipated coming into the year," CEO Vasos said.

Cost of goods sold rose more than net sales, up 5.9% to $7.15 billion. That pushed gross margin down to 29.96% from 31.08%.

Among the actions taken in "controlling what we can control," Vasos said employee presence at the front of the stores has been increased, in-stock levels have been "significantly" improved and a continued focus on providing low price points, including 2,000 items at or below $1.

For the full-year of fiscal 2024, the company cut its guidance ranges for EPS to $5.50 to $6.20 from $6.80 to $7.55, for net sales growth to 4.7% to 5.3% from 6% to 6.7% and for same-store sales growth to 1% to 1.6% from 2% to 2.7%.

The company still expects capital expenditures of $1.3 billion to $1.4 billion for the year. The company also still plans for 730 new store openings, 1,620 remodels and 85 store relocations.

Separately, the company said it didn't repurchase any shares during the second quarter and doesn't expect repurchases for the rest of the fiscal year. Currently, there is $1.4 billion in share-repurchase authorization left in its buyback program.

The stock has tumbled 34.5% year to date, while the Consumer Staples Select Sector SPDR ETF XLP has gained 13.8% and the S&P 500 has advanced 18.1%.

-Tomi Kilgore

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08-29-24 1113ET

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