Dollar General Corp.’s stock tumbled 15% Thursday after the discount retailer posted weaker-than-expected second-quarter earnings and lowered its guidance.
The stock was on track for its lowest close since June 4, 2019, according to Dow Jones Market Data.
“While we are not satisfied with our overall financial results, we made significant progress in the second quarter improving execution in our supply chain and our stores, as well as reducing our inventory growth rate and further strengthening our price position,” Jeff Owen, Dollar General’s chief executive officer, said in a statement.
On a call with analysts, Owen said consumers are still showing signs of careful spending and prioritizing needs over wants. The company made targeted price reductions on certain key items to provide more affordable solutions, he said, according to a FactSet transcript.
“We have been pleased with the customer response both in terms of basket size and composition when the basket includes one of these items,” he said.
The Goodlettsville, Tenn.-based company
DG,
had net income of $468.8 million, or $2.13 a share, for the quarter, down from $678 million, or $2.98 a share, in the year-earlier period. Sales rose to $9.796 billion from $9.426 billion.
The FactSet consensus was for earnings per share of $2.47 and sales of $9.926 billion.
Same-store sales fell 0.1%, while FactSet was expecting a 0.9% rise.
The sales increase was mostly due to positive contributions from new stores, which were partially offset by a decline in same-store sales and by store closures. Same-store sales were hurt by lower traffic, partly offset by higher average transaction amount.
Owen said the company is making further investments to draw down inventory and drive growth in areas such as retail labor, and it expects an operating profit headwind of up to $170 million in the second half from those investments.
“Same-store sales in the second quarter of 2023 included declines in each of the home, seasonal, and apparel categories, partially offset by growth in the consumables category,” the statement said.
Gross profit as a percentage of sales was 31.4%, down from 32.3% a year ago, for a decline of 126 basis points. That was mostly due to lower inventory markups and increased shrink, markdowns and inventory damages, as well as to a greater proportion of sales coming from the consumables category, which has a lower gross profit rate than other product categories.
Many retailers this earnings season have complained about the impact of shrink, which can refer to damaged goods but more often means shoplifting, which retailers claim is being conducted by organized gangs.
Walmart
WMT,
Target
TGT,
Home Depot
HD,
Nordstrom
JWN,
and Dollar General’s key rival Dollar Tree
DLTR,
have all complained this earnings season about the issue. Dollar General said it’s now expecting shrink to create a roughly $100 million headwind over the rest of the year.
“While we expect this pressure to continue for the remainder of the year and recognize this is a challenge throughout retail, we are actively working to reduce these levels through multiple targeted actions,” said Chief Financial Officer Kelly Dilts. “These include reducing our inventory position, refreshing and refining our processes, leveraging additional tools and technology, and improving execution in our stores.”
See: Walmart’s ‘shrink’ challenges differ from those of other retail giants, CEO says
Related: Target facing ‘unacceptable amount’ of retail theft and organized retail crime, CEO says
Dollar General lowered its guidance and said it now expects sales to be up 1.3% to 3.3%, compared with prior guidance of up 3.5% to 5%. It expects EPS of about $7.10 to $8.30, or a decline of 34% to 22%, compared with prior guidance for a decline of about 8% to flat growth.
It said it expects same-store sales to be down about 1% to up about 1%, compared with prior guidance of growth of 1% to 2%.
Jefferies analyst Corey Tarlowe said the results were soft.
“Looking ahead, we believe [Dollar General] is faced with industry-wide headwinds and incremental investments, but stays well-positioned due to its high mix of consumables, private label expansion, and organic growth opportunities,” he wrote in a note to clients.
Jefferies has a buy rating on the stock and a $230 price target, which is 46% above its current price.
BMO analyst Kelly Bania said the cut in EPS guidance was significant and that negative traffic suggested a meaningful gap to key peer Dollar Tree, which saw traffic up in the high single digits in the quarter. Bania has a market-perform rating on the stock and a $175 price target, which is 33% above its current price.
The stock has fallen 45% in the year to date, while the S&P 500
SPX
has gained 17.6%.
For more, read: As concerns mount about organized retail crime, these are the products being targeted
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