Dollar General (DG, Financial) shares dropped 28% after missing Q2 EPS expectations. Revenue grew 4.2% year-over-year to $10.21 billion, but it still fell short of forecasts. The company significantly reduced its full-year EPS guidance to $5.50-6.20 from $6.80-7.55, indicating potential challenges in Q3 and Q4 with weak margins. Full-year sales outlook was also lowered.
- Dollar General made progress on its Back to Basics plan and achieved positive traffic growth in Q2. However, the company was not satisfied with its Q2 results, attributing softer sales trends to financially constrained core customers. To counter this, DG is enhancing its value and convenience offerings.
- Same-store comps for Q2 were weak at +0.5%, below internal expectations and down from +2.4% in Q1 and +0.7% in Q4. Comp growth was driven by increased traffic but offset by a decrease in average transaction amount. By category, Q2 comps saw growth in consumables but declines in seasonal, home, and apparel categories. Full-year comp guidance was reduced to +1.0-1.6% from +2.0-2.7%.
- Comps were strongest in June but turned negative in July. The three softest comp sales weeks of the quarter were the last week of each calendar month, indicating customers are struggling to stretch their budgets. DG's core customer base, which accounts for 60% of sales, predominantly comes from households earning less than $35,000 annually.
- Retail theft (shrink) remains a significant issue. DG has been taking steps to reduce shrink in its supply chain, merchandising, and stores. Actions include ensuring timely and full deliveries, removing high-shrink SKUs, and eliminating self-checkout in most stores.
Overall, dollar stores are facing tough times as their lower-income core customers feel the inflation pinch more acutely. Increased promotional activity has pressured sales and gross margins, contributing to the lowered EPS guidance.
It's almost a year since Todd Vasos returned as CEO in October 2023. Vasos, who previously led DG from June 2015 to November 2022, is making changes, but turning the company around will take time.
