A Plunge: Dollar General Faces an Unidentifiable Threat

Dollar General Corporation (NYSE: DG) experienced an extreme plunge in stock price, dropping almost 20% after its last quarterly financial results in the last few weeks. After being on a gradual and certain progressive ascent in stock price over the last 5 years, this nosedive definitely altered that aspirational linear trajectory. 

Could this decline be due to the inflationary pressures in conjunction with the rising interest rates, which are tightening what consumers have available to spend? Or possibly, though unlikely, could the retirement of John Garratt and promotion of Kelly Dilts as the new CFO be the cause? 

Dollar General reported a $9.34 billion revenue for fiscal Q1, 2023, missing the analysts expectation of $9.46 Billion. Concurrently, it also missed the $2.38 expected EPS (earnings per share), and instead reported a $2.34 EPS, compared to $2.41 EPS last year. Was it the subpar results from the expected revenue forecast compared to actual revenue where shareholders lost faith?

To pursue soothing the burning itch that’s plaguing the minds of many: what’s causing this steep decline for Dollar General stock price? 

According to the earnings call on Thursday, June 1 2023, Americans in the low-mid income bracket are scaling back purchasing activities caused by the higher prices of home goods and clothing. This is made apparent with a decline in store-traffic alongside a focus on consumers spending more on low-margin essential items. CEO, Jeff Owen says, “our same-store sales results were driven by increased basket size, partially offset by a decrease in customer traffic.”

To counteract this, Dollar General has reported an increase in higher income customer walk-ins. CFO, Kelly Dilts states, “while we have attracted and retained a significant number of customers in higher income brackets in recent years, our guidance does not assume a significant trade-in benefit for this year.”

Beyond that, bigger competitor retailers like Wal-Mart Stores Inc. (NYSE: WMT) (who upped its annual predictions) have kept a competitive advantage by keeping food and grocery prices low in order to fend off competitors – Target Corp. (NYSE:TGT) and Kroger Company (NYSE:KR). This downturn has not solely affected Dollar General. Rival Dollar Tree Inc. (NASDAQ: DLTR) also stated that its sales have shifted toward “lower-margin consumable merchandise.” 

In terms of the consumer, financial constraints are compiling, customers are receiving lower tax refunds and reductions in government food assistance payments. Jeff Owen says, “we continue to see signs of increasing financial strain on our customers as they seek affordable options, including increased reliance on private brands and items at or below the $1 price point.” Will items $1 or under become the primary focus? 

Surprisingly, the S&P 500 is up 14.58% YTD, meanwhile, baffling as it is, Dollar General has dropped dramatically. This is incredibly unexpected. On the contrary, in the past dollar stores have performed better while swimming against the tide when the markets have gone down. In the 2009 recession, dollar stores ended up performing better while retail chains were having to close stores down. This was a result of higher income consumers starting to shop down a level, and the regular dollar shoppers switching to retail chain stores.

As we know, from a historical precedent of a recession, the “dollar stores” perform stronger during economic contractions. So, after years of sustained progression, will the Dollar General ship withstand to be the lighthouse in the storm that is the economic slump? Or is it that Dollar General is about to face a completely different economic shift, unlike anything experienced ever before?