Dollar General hit hard in Q2 by customers still grappling with inflation

Consumers are still struggling with inflation, and Dollar General received a harsh reminder of the troubles at home during a soft second quarter, forcing the discount retailer to cut earnings projections for the rest of the year. 

Operating profit dropped 20.6% year over year to $555 million, while same-store sales increased just 0.5%. Net sales went up 4.2% vs. the same period a year ago at $10.2 billion. 

Wall Street did not take the news well as Dollar General stock was down nearly 30% midday Thursday. 

The Goodlettsville, Tenn.-based retailer said trouble started to hit in late July and a pattern developed, with the softest sales falling during the last week of each month. 

“This pattern suggests that our customers are less able to stretch their budgets through the end of the month,” Todd Vasos, CEO of Dollar General, told analysts Thursday, according to a transcript from financial-services site AlphaSense.. “With that in mind, as well as our continued softness in discretionary sales and our own customer data and survey work, we believe the softer than anticipated sales performance in Q2 is at least partially attributable to a core customer that is less confident of their financial position.”

Vasos said DG shoppers are saying they feel worse off financially than they did six months ago, and more than 60% claim they have had to sacrifice on purchasing basic necessities due to the higher cost of products. 

Additionally, about 30% of Dollar General consumers have at least one credit card that has reached its limit, and in a recent survey, 25% said they anticipate missing a bill payment in the next six months. 

In an effort to lure the struggling consumer, Dollar General has ramped up promotional activity, which in turn has pressured both sales and gross margin, something that is expected to continue for the rest of 2024. 

Gross profit also took a hit during the second quarter. As a percentage of sales it was 30%, a decrease of 112 basis points. DG attributes the decrease to the increase in markdowns, increased inventory damages, a greater proportion of sales coming from the consumables category, and increased shrink.

Net income also took a big hit. It was down 20.2% year over year at $374.2 million. 

Looking at the rest of 2024, Dollar General does not expect momentum to shift. After initially calling for net sales growth in the 6.0% to 6.7% range, DG now sees it more in the 4.7% to 5.3% range. Same-store sales growth, projected at 2.0% to 2.7%, is now expected to be 1.0% to 1.6%.

“We expect additional pressure as a result of the increased promotional markdown activity as well as increased sales mix pressure due to the customers’ need to prioritize their spending on the consumables category,” Kelly Dilts, CFO and executive vice president at Dollar General, said during the earnings call. “With regard to damages, our guidance now assumes no improvement in the back half of the year.”

Dollar General will continue to lean on its Back to Basics strategy, which focuses on supply chain, merchandising, and labor. 

“We’ve proven that once we continue to back that consumer through tough times, she’s there when the better times come and she’s very sticky,” said Vasos. “And that’s exactly how we’re approaching it this time around.”