Dollar General Corp. (DG) experienced a staggering 32% drop in its stock price on Thursday, marking its largest single-day decline on record. The discount retailer's steep stock plunge follows a dismal earnings report that revealed significant operational and consumer-related challenges. The company's revised outlook, indicating weaker-than-expected same-store sales growth, has rattled investors and raised concerns about the future of the dollar store business model.
The retailer's fiscal 2024 projections now estimate same-store sales growth of only 1.0% to 1.6%, a sharp decrease from the previous forecast of 2.0% to 2.7%. CEO Todd Vasos attributed the downturn to a "cash-strapped" consumer base, revealing that the last week of each month was particularly weak, with shoppers focusing on essential items priced at $1 or below. "It appears to us very strongly that... this lower-end consumer continues to be very much financially strapped," Vasos said during the earnings call.
This revelation comes amidst broader struggles within the dollar store sector. Dollar General's major rival, Dollar Tree (DLTR), also saw its shares drop by 10% following Dollar General's announcement. The competitive landscape has intensified as larger retailers like Walmart (WMT) and Target (TGT) expand their offerings and cut prices, potentially eroding the value proposition of discount chains.
Dollar General's financial difficulties are compounded by increased markdowns, higher inventory damages, and rising theft, which have further squeezed profit margins. The company reported a gross profit margin of 30%, down from 31.1% a year earlier, and an adjusted earnings per share of $1.70, falling short of Wall Street's expectation of $1.79. Revenue also missed projections, coming in at $10.21 billion compared to the anticipated $10.36 billion.
In response to these challenges, Dollar General has embarked on a "Back to Basics" improvement plan, led by CEO Todd Vasos, who returned to the company last year. However, the plan has yet to show significant results. Arun Sundaram, a senior equity analyst at CFRA Research, downgraded Dollar General's stock from Buy to Hold, citing the diminishing appeal of dollar stores as larger retailers enhance their omni-channel offerings and maintain lower prices.
The downturn in Dollar General's fortunes is also indicative of broader issues facing dollar stores. GlobalData retail analyst Neil Saunders noted that as inflation eases and more retailers focus on value-for-money propositions, dollar stores are struggling to maintain their competitive edge. This competitive pressure, combined with operational issues such as increased theft and damage, has further strained the sector.
Furthermore, Dollar General has faced scrutiny over safety concerns, with Occupational Safety and Health Administration (OSHA) inspections leading to substantial fines and settlements. Safety issues have compounded operational difficulties, including a rat infestation at Family Dollar, a Dollar Tree brand, which led to significant recalls and the closure of a distribution center.
Despite the challenges, Dollar General remains committed to its $1 price point for approximately 2,000 items, a strategy that sets it apart from competitors like Dollar Tree, which recently increased its primary price point to $1.25. Vasos emphasized, "We've never walked away from that $1 price point," signaling a firm stance amid a rapidly changing retail environment.
