Dollar General’s results show rising overall prices are a problem not only for consumers but also for retailers’ input costs.
By guest author Jinjoo Lee from the Wall Street Journal
With U.S. inflation running at a 40-year high, it is getting tougher for consumers to stretch their dollars. That might seem like a bonanza for a retailer like Dollar General, but the picture is actually a bit more complicated.
Dollar General reported on Thursday that same-store sales declined 1.4% in the fourth quarter ended Jan. 28 from a year earlier, which was slightly worse than analyst expectations of a 0.8% decline. Customer traffic dropped, though the average basket size grew. That is partly due to inflation, but shoppers also were buying one more item on average compared with pre-pandemic levels. By the end of 2021, it had grown to an average of six items worth USD 16, up from five items worth USD 13 at the end of 2019.
Inflation is pinching Dollar General in multiple ways. One is on its gross margin line, which was 31.2% in the fourth quarter, a decline of 1.3 percentage points from a year earlier, as transportation and distribution became costlier. Capital expenditures are another issue; higher steel costs are expected to make new store openings more expensive, said Chief Executive Todd Vasos on an earnings call. For 2022, capex is set to be roughly 4 % of revenue, higher than the typical range of 2.5 % to 3 %.
Dollar General is trying to compensate. Notably, the retailer plans to rely less on third parties for hauling goods. By the end of 2022, its private fleet is expected to comprise 40 % of the tractors used to transport goods from distribution centers to stores, up from 20 % at the end of 2021. It also is continuing its rollout of self-distribution on frozen and refrigerated items, which already is yielding cost savings.
The more concerning—and unpredictable—effect of inflation is what it might do to the economic health of low-income people who comprise Dollar General’s core customer base. One worrying indicator is that inflation has been outpacing growth in wages for almost a year. Federal stimulus payments and expanded child tax credits also both ended last year, taking away an important boost to wallets. While there is consensus that lower-income consumers are getting pressured, there is divergence among analysts on what that means for dollar stores.
Bulls say that a stretched consumer should boost traffic as long as the job market is so robust. Mr. Vasos was upbeat, saying that the economic health of low-income consumers depends on whether they are employed. He also said that when gasoline prices hit $4 a gallon, consumers tend to stay closer to home. That should be an advantage to Dollar General, whose stores tend to be closer to homes compared with larger retailers.
But things could look worse first before they get better. Scot Ciccarelli, analyst at Truist Securities, notes that going into the 2007-09 recession, as low-income consumers started getting squeezed first by sharply rising food and gas prices, same-store sales at dollar stores declined toward the end of 2007. Only starting in 2008, when unemployment levels started spiking, hitting higher-income consumers too, did dollar stores begin thriving as more shoppers traded down.
Better-than-expected growth at Dollar General could, unfortunately, end up being a negative indicator for the U.S. economy overall.