Our Two Cents on Dollar General

Dollar General, one of the major discount retailers south of the border, reported weak earnings at the end of August. Its gross profit plummeted 24% due to rising theft, causing earnings to come in 15% weaker than expected. If that wasn’t enough bad news for one report, management also cut their sales guidance for the rest of the year. The market was not impressed, and the stock price collapsed 12% the next day. Since then, it has continued to fall. In fact, the stock is now down 34% since that late August report.

We recently reviewed the stock. It’s a name we plan to add, but not right away. Here is why we believe it is still too early.

Dollar General expects to lose $100 million this year due to lost inventory. And they’re not alone. It’s a problem that costs retailers a collective $112 billion per year. Dick’s Sporting Goods, Kohl’s, Foot Locker, Target, Walmart, and Dollar Tree are also reporting elevated theft as well. Yesterday, Target announced it will close nine stores in major cities due to theft and violence. Retailers that appeal to higher end consumers, such as Costco, aren’t experiencing theft nearly to the same degree. While this is clearly an unintended consequence to higher rates, Dollar General expects shoplifting to get worse.

Inflation has increased the average household’s expenditures by about $700 per year compared to July 2021. Dollar General’s core consumer, Americans with a US$35K household income, depleted their pandemic savings during the summer. Middle-income consumers with a household income between US$35-75K will have some savings left until the end of the fall.

As if inflation and higher interest rates weren’t enough, cuts to SNAP payments (which is a U.S. subsidy for grocery bills) and the expiration of a childcare tax credit have made matters worse. Wal Mart’s CFO recently said that “customers are stretching their dollars further and seeking better value across more categories more often.”

The weakness in the low-end consumer is a problem beyond Dollar General’s control. In recent weeks, the oil price has run up, causing the price at the pump to increase. Next week, student loan repayments resume. These two shocks will surely weaken the Dollar General core consumer even further.

To buy Dollar General now would be premature. It’s certainly a name on our watch list, but we plan to buy it at a better price.