Dollar General Earnings: Tough 2023 Continues as Demand Slows and Margins Suffer Steep Decline

As expected, narrow-moat Dollar General continued to absorb the effects of abating fiscal stimulus and cumulative inflationary pressures that have pinched the wallets of its core low-income consumer. Same-store sales dropped 1.3% during the third quarter as shoppers tapered spending across each merchandise category, with the pullback most pronounced in nonconsumable areas like home products and apparel. Encouragingly, while average ticket suffered, management noted an increase in store traffic and cited sequential improvement throughout the quarter. Also as expected, Dollar General posted a weak operating margin of 4.5%, down 330 basis points over the prior year. Margins primarily suffered from elevated markdowns to clear inventory, with management saying nonconsumable inventory per store is down 19% over the prior year. Other factors included investments to improve labor hours (the firm is on track to allocate $150 million to additional store labor hours), and cost deleverage from weaker sales. We expect to see continued markdowns and investment at the store and supply chain level as CEO Todd Vasos, in his first quarter back at the helm after a brief hiatus, emphasized rationalizing the firm's portfolio of stock-keeping units, driving distribution productivity, and improving the store environment that we suggest has suffered from underinvestment.