Dollar General stock plunges as 'challenging' economic backdrop drives dismal earnings report

Dollar General’s core customers are reining in their spending amid a worse-than-expected macroeconomic backdrop, leading the discounter to slash its full-year outlook after a dismal earnings report Thursday. 

Shares of Dollar General plunged nearly 20% Thursday, closing at $161.86 after the retailer missed estimates on the top and bottom lines. 

Here’s how Dollar General did in its first fiscal quarter compared with what Wall Street was anticipating, based on a survey of analysts by Refinitiv:

• Earnings per share: $2.34 vs. $2.38 expected
• Revenue: $9.34 billion vs. $9.46 billion expected

The company’s reported net income for the three-month period that ended May 5 was $514.4 million, or $2.34 per share, compared with $552.7 million, or $2.41 per share, a year earlier. 

Revenue rose to $9.3 billion, up nearly 7% from $8.8 billion a year earlier. 

Same-store sales, a key industry metric, increased 1.6%, but the growth was half of the 3.8% jump that analysts had expected, according to StreetAccount. The growth was driven by strength in consumables, but was offset by slowdowns in seasonal, home and apparel categories, which carry higher margins than food. 

In a news release, CEO Jeff Owen said the macroeconomic environment “has been more challenging than expected, particularly for our core consumer.” The company believes those headwinds are having a “significant impact” on its customers’ “spending levels and behaviors.”

“We are controlling what we can control and have made significant progress improving our execution on multiple fronts,” he said. 

The company slashed its full-year outlook for fiscal 2023. It now expects net sales to rise between 3.5% and 5%, compared with a previous range of 5.5% to 6% growth. Analysts surveyed by Refinitiv had expected full year sales to grow 5.7%.

Dollar General anticipates same-store sales will increase about 1% to 2%, compared with a previous range of 3% to 3.5%. Analysts had been expecting same-store sales to grow 3.4%, according to Street Account. 

The company now expects earnings per share in the range of flat to down 8% from the prior year, compared with a previous guidance of up 4% to 6%. Analysts had been expecting earnings per share to be up 4.3%, according to Refinitiv.  

Dollar General, the fastest-growing retailer by store count, has been bullish on its prospects and announced more store openings than any other retailer in 2022, according to Coresight Research, a retail-focused advisory firm. It previously committed to opening 1,050 more new stores in fiscal 2023, including around 150 new Popshelf stores, which primarily sell discretionary items and cater to customers with higher incomes.

Dollar General is dialing back the expansion. The company now expects to open only 90 new Popshelf stores, bringing the total planned new doors in fiscal 2023 to 990.

“We believe this is a prudent reduction based on the current environment and as other retailers navigate what this environment means for their businesses, we believe there may be more favorable real estate opportunities to come,” executives said on an earnings call.

It noted Popshelf sales are currently softer than they previously were, but it’s still “pleased” with the customer response to the shops.

During the quarter, Dollar General – like many of its customers – was also hit by steep interest rate hikes. Interest expenses in the quarter jumped 109.3% to $83 million, compared with $39.7 million in the year-ago period, which was driven by higher average borrowings and higher interest rates, it said. 

It did see its margins jump by 0.3 percentage point, which it attributed to higher inventory markups and decreased transportation costs. But the growth was offset by a jump in shrink, markdowns, inventory damage and more food sales than in discretionary categories.  

By the end of the quarter, merchandise inventories, at cost, were $7.3 billion, up 14.7% from $6.1 billion a year earlier on a per-store basis. The increase was driven by product cost inflation, the company said.

Besides its financial woes, the company has also been facing mounting pressure to improve working conditions for its employees from federal regulators, activists and staff. It has racked up more than $21 million in fines from the federal Occupational Safety and Health Administration for a slew of safety hazards, including blocked fire exits, blocked electrical outlets and dangerous levels of clutter. 

During its annual meeting Wednesday, shareholders approved a resolution to commission an independent audit into worker safety. It’s unclear if the resolution is binding and if the retailer will conduct the audit.

Read the full earnings release here.