Ominous Earnings: Dollar General (NYSE: DG) and Dollar Tree (NASDAQ: DLTR)

A very clear trend has emerged in America’s bargain basement — dollar stores like Dollar General (NYSE: DG) and Dollar Tree (NASDAQ: DLTR) — and it’s not a good one.

Both stocks were hammered last week after reporting earnings that fell well short of expectations. More than that, the reports highlighted a sharp realignment in consumer spending trends.

First, Dollar Tree reported a 26% drop in second-quarter earnings, which caved to $0.67 per share. The company also cut its full-year profit guidance by a staggering 20% from $6.50–$7.00 to $5.20–$5.60.

This, according to management, was the result of “one of the most challenging macro environments we’ve ever seen.”

Dollar General, which reported on the same day, told a similar story. The company reported a 20.2% drop in EPS, which came in at $1.70. And operating profit fell 20.6%, to $550 million.

Dollar General also lowered its full-year guidance. It cut revenue expectations from $31 billion–$32 billion to $30.6 billion–$30.9 billion. And it cut earnings projections from $6.80–$7.55 per share to $5.50–$6.20. 

Echoing Dollar Tree’s sentiment, Dollar General management attributed the declines to “a weaker sales environment for our core customer than we had anticipated.”

“Notably, the three softest comp sales weeks of the quarter were the last week of each of the calendar months,” said CEO Todd Vasos. “This pattern suggests that our customers are less able to stretch their budgets through the end of the month.”

I’ll admit, at first I was skeptical of these remarks. After all, the pattern of low-income shoppers spending less as the month wears doesn’t seem new. It seems pretty typical of people living paycheck to paycheck — even in “good” times.

Both Dollar General and Dollar Tree have also made missteps regarding their inventory by expanding their focus to include more discretionary items, as opposed to consumables (i.e., necessities). 

And maybe more than anything else, the real red flag for me was that other major discount retailers like Walmart (NYSE: WMT) and Costco (NASDAQ: COST) have been thriving in this same environment. 

Indeed, Walmart and Costco have seen their shares soar 45% and 59%, respectively, this year, while Dollar General and Dollar Tree have plunged by 43% and 55%.

However, drilling down further, it’s become clear that Walmart and Costco are thriving not because they’re attracting low-income shoppers but because they’re pulling more from middle- and upper-income classes these days. 

Walmart, for example, reported outstanding second-quarter earnings last month, with a 4.8% increase in quarterly revenue, a 4.2% increase in sales, and higher guidance for the rest of the year.

“We’re also seeing higher engagement across income cohorts, with upper-income households continuing to account for the majority of gains, even while we grow sales and share among middle- and lower-income households,” Walmart CEO Doug McMillon noted.

I’d also note that when Walmart says “lower-income,” it means people making less than $50,000 per year. But when it comes to dollar stores, their key demo is the poorest of the poor — people making less than $35,000 annually. 

So, while these stores have made a mistake by moving away from consumables (Walmart, by contrast, is really a glorified grocer these days), they may also be the canary in the coal mine. 

That hypothesis would be further corroborated by consumer sentiment, which got a slight bounce in August, but only after five months of decline.

Commensurate with that, in Mizuho’s August consumer survey, both low- and middle-income consumers reported a net worsening of financial conditions in the past six months. 

Among consumer groups, only higher-income consumers said conditions remained robust. And that’s likely due to a strong stock market and persistently high home prices.

Aside from that, though, everyone else seems to be hurting. 

And the trend seems to be darkly persistent — accelerating, even. 

So it’s worth keeping an eye on.

Fight on,

Jason Simpkins

Simpkins is the founder and editor of Secret Stock Files, an investment service that focuses on companies with assets — tangible resources and products that can hold and appreciate in value. He covers mining companies, energy companies, defense contractors, dividend payers, commodities, staples, legacies and more…

In 2023 he joined The Wealth Advisory team as a defense market analyst where he reviews and recommends new military and government opportunities that come across his radar, especially those that spin-off healthy, growing income streams. For more on Jason, check out his editor’s page.

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