Dollar General reported a +0.5% comparable sales increase with traffic per location up +0.5% according to our data; both KPIs consistent with past 12 months; the operating profit decline at -21% was also in line with Q1’s rate. (Again, confirming evidence for why 99 Cents Only chose to shut down.)
This year, we’ve also written a lot about the substantial increase in cross-shopping and how “nobody is staying in their own swim lane.” This is especially evident as shown in the table below. Dollar General’s customers are more frequently visiting a Walmart (for those visitors who have visited a Walmart at least twice in the past six months) by 6%, Target by 14%, Costco by +38%, and Aldi by an incredible 49%. As it relates to Aldi, it was 10.6% of Dollar General’s customers last year; this year it’s 15.1%. By contrast, the cross-shopping of the Walmart customer is down for Dollar General and Family Dollar.
Recall that Walmart, Target, Sam’s Club, and Costco are aggressively pushing prices down from their suppliers and passing those savings on to their customers. That’s brutal for the dollar store competition given their lower unit economics and business model (lower SKU price points, but frequently a higher price per unit-volume) and the need for a 3%+ comp to lever expenses. Walmart and Costco generally see an increase in volume when they lower prices. Essentials-based dollar stores don’t see such a positive price elasticity on volume; penny profit just falls. CEO Todd Vasos said, “We're not seeing any one competitor, mass or anywhere else, take our core customer. But what we did see was, at least in this quarter, the mass channel, especially those that are down south actually did a lot better in gaining the share that was available in the marketplace. We didn't get our fair share of that.”
Other factors impacting Dollar General’s profitability include higher theft-shrink, increased markdowns, adverse merchandise mix, lower markups, and a pressing need to enhance the store service levels and standards further. All told, sales and profits were guided lower. Given that Dollar General is the largest dollar store brand, these results and outlook are certain to stoke fears about dollar store saturation.
When describing the consumer environment, Vasos shared, “Notably, the three softest comp sales weeks of the quarter were the last week of each of the calendar months. This pattern suggests that our customers are less able to stretch their budgets through the end of the month. With that in mind, as well as our continued softness in discretionary sales in our own customer data and survey work, we believe the softer-than-anticipated sales performance in Q2 2024 is at least partially attributable to a core customer that is less confident of their financial position. I want to provide some additional context around what we're seeing and hearing from our customers. The majority of them state that they feel worse off financially than they were six months ago as higher prices, softer employment levels and increased borrowing costs have negatively impacted low-income consumer sentiment.
As a result, our core customer who contributes approximately 60% of our overall sales comes predominantly from households earning less than $35,000 annually. Inflation has continued to negatively impact these households with more than 60% claiming they have had to sacrifice on purchasing basic necessities due to the higher cost of those items, in addition to paying more for expenses such as rent, utilities and health care. More of our customers report that they are now resorting to using credit cards for basic household needs and approximately 30% have at least one credit card that has reached its limit. And in our latest survey, 25% of our customers surveyed noted they anticipated missing a bill payment in the next 6 months. While middle and higher-income households are seeking value as well, they don't claim to feel the same level of pressure as low-income households.
As customers have felt more pressure on their spending, we have also seen a corresponding elevation in the promotional environment beyond what we had anticipated coming into the year...[T]he increased promotional activity has pressured both sales and gross margin, and we anticipate this will likely continue for the duration of the year...Providing a meaningful value to our customer continues to be a top priority. We have a multifaceted approach to deliver that value, including a strong everyday low price on national and private brands, compelling promotions on sales events and low opening price points, including approximately 2,000 items at or below $1 every day.”
