Dollar stores are supposed to be recession proof. When times are hard, shoppers turn to them to save money. During the recession of the late noughties, Dollar Tree’s stock shot up more than 60 per cent while the S&P 500 index fell more than a third.
But inflation was low then. These days, no one is immune to the pressure of galloping prices, not even dollar stores. Just look at Dollar General. The US’s largest discount store operator with more than 19,000 locations, lost a fifth — or $9bn — of its market value on Thursday after it axed full-year guidance.
Earnings per share are expected to fall as much as 8 per cent this year, compared to a forecast of 4 per cent to 6 per cent increase made three months ago. Like-for-like sales, a key metric for retailers, will rise as little as 1 per cent, down from a gain of at least 3 per cent. Share buybacks are off the agenda.
Dollar General’s problem is not a lack of shoppers. Net sales increased 6.8 per cent to $9.3bn during the first quarter. But high food prices are keeping the company’s rural, lower-income customers from spending on higher margin discretionary items. While food sales rose 9 per cent during the quarter, sales of home products and apparel fell 8.1 per cent and 1.6 per cent respectively.
Dollar General said lower than usual tax refunds this year and cuts to food stamp benefits are to blame. Competition from a reinvigorated Walmart, must be another factor.
The chain is trying to appeal to more people through fancier store formats and a push into healthcare. This looks ill-timed. Rising operating costs and interest expenses are squeezing profits. The return on invested capital fell to 9.5 per cent last year, compared to more than 15 per cent in 2017.
At 15 times forward earnings, Dollar General is trading at a discount to rivals Dollar Tree and Walmart. To win back investors, it needs to refocus on its core trade: selling cheap groceries and household supplies to lower income shoppers.
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