Shrink, declining discretionary sales lead to rough Q2 for Dollar General

Dollar General’s stock sank Thursday morning, falling about 16% to a one-year low, after the discounter reported it was “not satisfied” with its second quarter results.

Sales of food and beverages rose 6% during the quarter ended Aug. 4, but that was not enough to make up for significant shortfalls in discretionary sales, prompting the retailer to lower its financial forecast for the rest of the year.

Dollar General’s same-store sales fell 0.1% during the quarter and operating profit declined 24.2% to $692.3 million. Net sales increased 3.9% to $9.8 billion.

Shrink posed an even greater threat than anticipated and the company now expects an additional $100 million impact because of theft, executives told analysts Thursday. Dollar General said it is working to reduce inventory, refine its processes and rely on technology to improve in-store operations as it seeks to reduce shrink.

“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,” Dollar General CEO Jeff Owen said in a statement.

Dollar General continues to boost its grocery assortment, adding more than 19,000 cooler doors during the second quarter, with plans to install more than 65,000 cooler doors systemwide in 2023 as part of its DG Fresh initiative.

“And while produce is not currently serviced by our internal supply chain, we continue to believe that DG Fresh provides a potential path forward to expanding our produce offering to more than 10,000 stores over time,” Owen told analysts, according to a transcript from financial services site AlphaSense. “We know this offering is important to customers, especially in rural areas.”

By the end of the second quarter, Dollar General sold fresh produce in more than 4,400 stores and said it intends to expand that to more than 5,000 stores by the end of the year.

Dollar General said it is working to eliminate excess inventory, mostly discretionary items, through expanded markdowns. The move will likely cost the retailer about $95 million before the end of the year, but Owen said it is expected to “accelerate improvement in a number of areas, including store and supply chain efficiencies as well as shrink, damages and cash flow.”

The retailer opened 215 new stores during the second quarter, completed 614 remodels and relocated 20 stores.

For the year, Dollar General plans to open a total of 990 new stores, complete 2,000 remodels and undertake 120 relocations.

Dollar General ended the second quarter with 19,488 total locations.