Dollar General Stock Jumps But Rural America Profit Struggles Remain

For years now the hard discount ‘dollar’ stores have been able to do little wrong across the American continent and Dollar General
DG
was the king of them all.

Its strategy of trading from the small and often less affluent towns that Walmart
WMT
typically avoided saw it build a huge store estate across the country. However, tough times have eroded margins and a shift into a widening range of activities has not paid off.

Now the U.S. retail colossus has responded swiftly and ruthlessly in a bid to reverse its flagging fortunes and the market has responded positively…for now.

Dollar General shares soared over 9% Friday as investors and analysts reacted with enthusiasm to the second coming of former CEO Todd Vasos, who is replacing Jeff Owen less than a year into his tenure amid weakening traffic and margin pressure.

Yet despite that stock surge, Tennessee-based Dollar General remains encumbered by its focus on rural America, where hard-up families are struggling to make ends meet and switching to lower cost items with poorer margins.

As a result, Dollar General had missed profit estimates in all of the past four quarters, struggling to put the brakes on not just margin squeeze but store traffic declines, inventory shrink and intensifying competition.

Vasos, previously at the helm of Dollar General from June 2015 to November 2022, will likely make his initial focus all about improving in-stock levels, tightening up store operations and getting a handle on inventory shrink and labor costs.

Restoring Investor Confidence

Indeed Vasos’ appointment is more than anything about a safe pair of hands, restoring stability and confidence in a company whose stock has lost over half its value in the year to date.

Its focus on low-income towns across America without a Walmart was previously a strength and made it one of the country’s most valuable retailers, ending 2022 with $37.8 billion in annual sales — up 10% on the year previous — and a market valuation of $55.1 billion.

But rural America’s travails have become Dollar General’s struggles. Its boast that 80% of its 19,000-plus stores are located in towns with populations of less than 20,000 is in danger of becoming a millstone.

While food sales rose 6% during the second quarter, homewares and apparel sales both fell by more than 7% as the increased cost of living bit, while a diversion into healthcare have driven up costs without a commensurate boost in sales and margins.

Meantime, Walmart, Dollar Tree
DLTR
, and Family Dollar have ramped up competition and Germany’s Aldi continues to expand its footprint.

Dollar General Resets Strategy

The company has revised annual sales and profit estimates downwards and Vasos “is acutely aware of the challenges facing our business and the industry more broadly” Dollar General said of his appointment, which became effective immediately.

They will be hoping for more than a one day stock boost. During his previous stint, the company’s annual revenue rose more than 80% and about 7,000 more stores were added to its national portfolio.

“The move is a clear acknowledgment of rising investor concerns about the company’s future related to a clouded business strategy, choppy execution, consistent earnings misses, and a decline in the share price since Owen took over,” Telsey Advisory Group analyst Joe Feldman said in a note.