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Shares of Dollar General last Thursday tumbled by about 30% after a second-quarter shortfall raised concerns that dollar stores in general are losing share to Walmart, Target, ALDI, Temu, and others built around value.
"We believe the macro, competition, and underinvestment are taking a toll," said Wells Fargo analyst Edward Kelly in a note following Dollar General's earnings report, according to Seeking Alpha. Highlighting stronger competition, particularly from Walmart, Kelly believes Dollar General needs to make a major investment in labor to better compete.
“[Dollar General’s results] show the challenge of maintaining market share with Walmart winning in a slower growth environment,” Evercore ISI analyst Michael Montani said in a note, according to Reuters.
Same-store sales at Dollar General increased 0.5% during the second quarter as 1% growth in customer traffic offset lower average unit retail prices per item.
Dollar General’s struggles come as Walmart and Target both delivered stronger-than-expected second-quarter results as they’ve both brought down prices on daily essentials amid skyrocketing inflation in recent years. TJX, Ross, and Burlington Stores in the off-price soft goods space also delivered healthy second-quarter results.
On Dollar General’s second-quarter call, an analyst asked management whether they agreed with investor sentiment that “Dollar General and the small box value model is simply structurally challenged either because there's too many stores, it's not as sufficiently exposed to the online channel, or not attracting enough incremental customers perhaps due to competition.”
Ceo Todd Vasos answered, “We fundamentally don't believe at all that the model is structurally challenged. But there are challenges to the business as this quarter indicated.”
Vasos said store openings are delivering “strong returns” and the retailer isn’t losing share with its core customers, which are households earning less than $35,000 annually.
The quarterly shortfall reflects continued softness in discretionary sales due to “a core customer that is less confident of their financial position,” Vasos said. He added, “The majority of them state that they feel worse off financially than they were six months ago as higher prices, softer employment levels, and increased borrowing costs have negatively impacted low-income consumer sentiment.”
Vasos explained that Dollar General is also gaining share “against all classes of trade in the consumable realm.” Declines in the quarter were particularly seen in seasonal home and apparel categories.
However, he admitted that Dollar General “didn't get our fair share” of middle- and higher-income households trading down. He said, “At least in this quarter, the mass channel, especially those that are down south, actually did a lot better in gaining the share that was available in the marketplace.”
In response, Vasos said Dollar General is “on the offense, and we've done that very successfully here over the years.” During the call, Vasos provided an update on its “Back-To-Basics” initiative to drive in-store traffic. The program includes:
- Elevating in-store experience: Increasing employee presence at the front end of stores to deliver a “friendly, welcome, and elevated level of engagement.”
- Improving in-stock levels: Focusing labor hours on perpetual inventory management and enhancing the sorting process at distribution centers to improve on-shelf availability.
- Improving employee retention: Reducing the number of floor stands and the number of times displays are rotated on sales floors as well as simplifying in-store stocking procedures to help reduce staff turnover and enable store teams to spend more time engaging with customers.
Vasos also believes in Dollar General’s value proposition, which involves an everyday low pricing structure, including approximately 2,000 items at or below $1, complemented by promotions on sales events.
“We're just going through a little bit of a transition period and a transformation,” said Vasos. “And it's never usually a straight line to the top when you do these, right? And so, a few bumps in the road, but we feel that we know exactly how we can go about garnering that share that's available out there.”