Dollar General: Value chain woes undermine its defensive credentials

Dollar stores are considered recession proof. When times are tough, shoppers turn to them to save money. During the late-bargain slump, Dollar Tree stock soared more than 60 percent, while the S&P 500 index fell by more than a third.

But then inflation was less. These days, no one is immune to the pressures of rapidly rising prices, not even the dollar store. Just look at Dollar General. America’s biggest discount store operator with more than 19,000 locations lost a fifth – or $9bn – of its market value on Thursday after slashing full-year guidance.

Earnings per share are expected to decline 8% this year, compared to a forecast of 4% to 6% growth made three months ago. Same-store sales, a key metric for retailers, will increase by less than 1 percent, down from a gain of at least 3 percent. Share buyback is off the agenda.

Dollar General’s problem isn’t a lack of buyers. Net sales increased 6.8 percent to $9.3 billion during the first quarter. But higher food prices are keeping the company’s rural, lower-income customers from spending on higher-margin discretionary items. While food sales grew 9 percent during the quarter, sales of household products and apparel declined 8.1 percent and 1.6 percent, respectively.

Dollar General said fewer tax refunds than usual this year and cuts in food stamp benefits are to blame. Competition from a renewed Walmart, should be another factor.

The chain is trying to appeal to more people through fancier store formats and push into healthcare. This seems to be the wrong time. Rising operating costs and interest expenses are eroding profits. The return on invested capital fell to 9.5 percent last year, compared to more than 15 percent 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 business: selling cheap groceries and household supplies to low-income shoppers.

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