Dollar General: rural America is no longer a gold mine

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For years, Dollar General dominated the dollar store sector. A focus on remote, low-income towns that rival Walmart avoids helped the discount chain to generate nearly $38bn in annual sales last year — more than twice the figure it pulled in a decade ago. Its market valuation approached $60bn earlier this year, making it one of the most valuable retailers in the US.

These days, however, rural America is struggling. Tennessee-based Dollar General likes to boast in its earnings calls that 80 per cent of its 19,000-plus stores are located in towns with populations of less than 20,000. But having a large, remote footprint is no longer an advantage. 

The company on Thursday reported its second profit warning of the year. Earnings are expected to decline between 22 per cent to 34 per cent in 2023, down from the flat-to-8 per cent decrease it forecast just three months ago.

High food prices are preventing the company’s core customer base from spending on higher margin discretionary items. While food sales rose 6 per cent during the second quarter, sales of home products and apparel fell 7.7 per cent and 7.1 per cent respectively.

Weaker demand is only one part of the problem. Dollar General is also struggling with inventory, supply chain management and greater competition from Walmart and Dollar Tree. In the latest quarter, Dollar General’s same-store sales fell 0.1 per cent, while those at Dollar Tree rose 7 per cent.

An expansion into new store formats and a push into healthcare are driving up operating costs. The return on invested capital has fallen in each of the past two years. Including Thursday’s 14 per cent decline, General Dollar shares have lost more than 45 per cent of their value this year. That leaves the stock trading at just 12 times forward earnings, a sharp discount to those at Dollar Tree and Walmart. Dollar General concedes that its customers will remain under pressure. The same can be said for its share price.