Shares of Dollar General Corp. dove toward a 5 1/2-month low Thursday, as higher costs and reductions in items purchased by customers led to disappointing fiscal third-quarter results and fourth-quarter outlook.
“We continued to see customer behaviors in Q3 that we believe indicate they are feeling increased financial pressure including reductions in the number of items purchased per basket and in discretionary spending, which was softer than anticipated during the quarter,” said Chief Operating Officer Jeff Owen on the post-earnings conference call with analysts.
The stock
DG,
-8.15%
tumbled 8% in afternoon trading, putting it on track for the lowest close since June 17. It was the biggest decliner among the S&P 500 index’s
SPX,
-0.00%
consumer discretionary sector, and the second-biggest decliner in the S&P 500.
The discount retailer early Thursday reported profit that rose from a year ago but was below analyst expectations. Net sales rose 11.1% to top expectations, boosted by a better-than-expected same-stores sales increase of 6.8%.
The company said same-store sales rose even though average number of items per basket declined, as inflation helped raise the average transaction amount.
Gross margin contracted to 30.5% from 30.8%, pressured by a rise in supply-chains costs resulting from unanticipated delays in acquiring additional temporary warehouse space. The company said that while it believes the gross margin pressures are “temporary,” they are expected to continue to a lesser degree in the current quarter.
The company said it expects fourth-quarter earnings per share of $3.15 to $3.30, well below the FactSet consensus of $3.66.
It doesn’t help that customers are trading down to cheaper items, which tend to have lower profit margins.
“Customers also continued to shift spending to more affordable options such as items at our dollar price point and private brands, while also shopping closer to payday at the first of the month,” COO Owen said.
And it’s not just Dollar General’s core lower-income customers that are buying cheaper goods. The company said it was seeing an increase in customers with annual household incomes of up to $100,000.
The stock has slipped 3.1% over the past three months, while the SPDR Consumer Discretionary Select Sector exchange-traded fund
XLY,
-0.07%
has lost 6.9% and the S&P 500 has gained 2.8%.
