Food Stamp Addicts Killing Dollar Stores

Government cuts to food stamp benefits aren't making life easy for the nation's major dollar store chains. 

Dollar General (DG) reported Thursday that third-quarter earnings came in at 84 cents a share, falling well short of Wall Street forecasts for 93 cents a share. Net sales rose 5% from the prior year to $5.32 billion, missing analysts estimates for $5.37 billion.

The sour news didn't stop there.

Dollar General's same-store sales, a key retail measure that reflects sales at stores open more than a year, dropped 0.1%. In last year's third quarter, which was prior to reductions in food stamp benefits by several states, Dollar General's same-store sales rose a solid 2.3%. Dollar General's main rival Dollar Tree (DLTR) has also seen sales growth slow sharply in the post inflated food stamp benefit world, with third-quarter same-store sales rising 1.7% vs. a 2.1% increase a year earlier. 

Meanwhile, Dollar General reduced its profit outlook for the year, saying earnings will come in below its long-term goal of 10% to 15% growth. Dollar General's stock plunged as much as 8% in early trading Thursday to $71.57. Over the past six months, shares of Dollar General and Dollar Tree have fallen 22% and 5%, respectively. 

In May, 43.5 million Americans were receiving food stamps, down 9% from the 2012 peak. Food stamp enrollment is on the wane as several states have ended benefits earlier than they were required. Seven states -- all Republican-led -- opted to end waivers for some enrollees that were created in the 2009 government stimulus package, despite the benefits being federally funded.

With less money in their pockets, dollar store customers are focusing on buying food as opposed to purchases of less importance. To try and entice low-income shoppers, Dollar Tree has focused on offering more products priced at $1. As for Dollar General, it's flat out lowering prices in key parts of the store. 

Dollar General began to slash prices on 17% of its top 450 selling items in the second quarter and stepped up the number of promotions it offers (see photos below), which has so far been met with mixed results according to executives. As a result of the response to the competitive backdrop, Dollar General's already razor thin profit margins took a hit in the third quarter -- gross profit margins fell 49 basis points from a year ago to 29.8%.

"The cuts in SNAP benefits [food stamps] have affected 56% of our store base -- so we have started to lower prices as our consumers need us right now," Dollar General CEO Todd Vasos told analysts on a conference call. Vasos added that Dollar General stores in states with the food stamp cuts saw their same-store sales in the third quarter lag the company average by 100 basis points.  

Said Dollar General's Chief Financial Officer John Garratt, "Clearly our consumers' budgets are being pinched, the SNAP reductions have taken a toll on their spending."

 

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