September 22, 2023

Even dollar stores are hurting as consumers become more cautious

Signs of an increasingly cautious consumer and a looming recession are not helping US dollar store chains.

While dollar stores used to thrive in times of economic uncertainty due to their low prices, this time they do different.

On Thursday, Dollar General (DG) lowered its full-year forecast for both sales and earnings, with earnings per share now expected to fall as much as 8% year-over-year.

“The macroeconomic environment is more challenging than the company previously anticipated, which the company believes is having a significant impact on customer spending levels and behavior,” Dollar General said in its release.

A week earlier, Dollar Tree (DLTR) lowered its earnings forecast, with management noting that their company is “not immune to the external pressures affecting the entire retail industry.”

Shares of both dollar stores are now down double digits over the past week.

The cuts to shopping guidelines come as retail revenues have painted a mixed picture for consumers. BJ’s (BJ) told investors that comparable sales in the current quarter were below comparisons. Target warned of a slowdown in consumer goods. But Walmart (WMT) said the company is healthy because some consumers benefit if they trade in.

“In retail, I say, it’s pretty much always a stock picker’s market,” Anthony Chukumba, general manager of Loop Capital Markets, recently told Yahoo Finance Live. “You just have to roll up your sleeves and do the work. Because while the rising tide lifts and lowers all boats, a lot of it has to do with company specific situations and strategies and management teams.”

Dollar stores are feeling pressure as consumers shift from discretionary items to consumables, which Chukumba says have a lower margin. Both stores missed Wall Street’s adjusted earnings per share for the prior quarter and forecast weaker-than-expected full-year results.

At Dollar Tree, rising product costs, higher theft and higher distribution costs lead to margin compression and therefore lower profits.

The discounter is also experiencing a price hike from last year when it raised its standard $1 price for goods to $1.25. Management believes this has led to difficult comparisons for same-store sales from a year ago when prices for their products were cheaper.

“There are just some elements that we think we still need to work from a product offering as we look at introducing new price points and the ability to get a little more margin where we weren’t able to before. at some of the lower price points,” Dollar Tree CFO Jeff Davis said during the company’s earnings call last week.

Meanwhile, shoppers at Dollar General are showing a clear trend toward cheaper goods, said Jeffery Owen, CEO of Dollar General.

“We see her buying fewer items per basket,” Owen said, referring to the consumer. “We see her really using that dollar price, and we’re really happy that we’re still offering that. And then we also see her buying closer to payday in the first of the month.”

During Thursday’s earnings call, Dollar General also announced plans to open 60 fewer stores this year than originally planned, a sign of the times for retailers according to Citi retail analyst Paul Lejuez.

“[The store revisions] are the latest indication that retail concepts focused on discretionary retail concepts are under pressure,” Lejuez wrote in a note to clients on Thursday.

Josh is a reporter for Yahoo Finance.

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