Dollar General shares sink on second annual forecast cut, disappointing investors

© Reuters. FILE PHOTO: Dollar General shopping carts are seen outside a store in Mount Rainier, Maryland, U.S., June 1, 2021. REUTERS/Erin Scott

By Savyata Mishra

(Reuters) - Dollar General (NYSE:DG)'s shares closed about 12% lower on Thursday, after it forecast a steep drop in annual profit and missed market expectations for second-quarter results due to weak customer traffic and a shift to lower-margin goods.

The Goodlettsville, Tennessee-based retailer has fallen short of average analyst forecasts for four straight quarters, cutting its full-year profit and sales targets on Thursday for the second time this year.

Its stock tracked a nearly three-and-a-half-year low, slumping as much as 18.5% to hit $128.48 - making it one of the worst performers on the S&P 500 index so far this year - as it battles bloated inventories and a shift in consumer spending patterns.

"We thought there was a risk that DG (the company) would need to invest more in stores than management initially expected, and reduce guidance as a result, but this is a much bigger cut than we (and the market) were expecting," Citi analyst Paul Lejuez said.

"Our revised guide is really a function of the slower transactions that we're seeing, and higher expected shrink," CFO Kelly Dilts said on a call with analysts.

The discount retailer plans to clear excess non-consumables inventory and ramp up labor investments ahead of the crucial holiday season.

"Dollar General's aggressive guidance cut should help establish a floor on the stock, but a deeper look suggests its strategic pivot may not be enough," said Wells Fargo analyst Edward Kelly.

The company said its low-to-middle-income customer was seeking cheaper options as it remained "financially constrained".

"We do not expect positive store traffic until the fourth quarter," Dilts said.

Evercore ISI analyst Michael Montani noted the company was wrestling for market share with Walmart (NYSE:WMT) and rival Dollar Tree (NASDAQ:DLTR).

Dollar General's 2023 same-store sales forecast of a 1% decline to 1% growth was slower than analysts' expectations of a 1.45% rise, according to Refinitiv data.

Excluding items, profit-per-share is expected to decline between 22% and 34%, steeper than a flat-to-8% drop it forecast earlier.

Its gross profit as a percentage of net sales fell 126 basis points in the quarter as retail shrink - inventory lost to theft and damage - worsened. It flagged $100 million in additional shrink headwinds since its last analyst address in June.

Same-store sales for the quarter ended Aug. 4 fell while analysts had expected a 1.08% rise. It earned an adjusted $2.13 per share, missing analysts' estimates of $2.46.