For months, we've been told that supply chain issues are beginning to ease. The reality, however, seems to be that logistical challenges are still very much a problem and they aren't going away anytime soon.
Just look at deep-discount retailer Dollar General (DG +0.76%), which continues to get slammed by supply chain disruptions. This causes higher-than-expected distribution and transportation costs. As a result, the company will miss earnings expectations and lower guidance for the rest of the year.
Expectations run into reality
This should be a time when Dollar General shines. Rising prices, higher interest rates, and inflated gas prices mean consumers are looking to stretch their wallets as far as they can. That often means turning to deep discounters like Dollar General.
While the dollar-store chain did say revenue jumped 11.1% to $9.5 billion on a near-7% gain in comparable-store sales, profits came in well short of analyst forecasts. This resulted in Dollar General slashing its earnings-growth guidance in half for the fiscal year. New-store openings are now expected to be toward the lower end of the company's prior guidance -- which was lowered last quarter -- as a result.
The new, more dour outlook is because Dollar General's supply chain is nowhere near back to normal, and the company expects that to continue through at least the fourth quarter. It has its fingers crossed that the damage the supply chain problems are causing will be less than they were in the third quarter.
NYSE: DG
Key Data Points
After all, management said last time out that as bad as the supply chain woes were, they were seeing "moderation" going forward and expected to benefit in the back half of the year as the retailer lapped the significant supply chain inflation it witnessed a year ago. It's clear now that none of that happened, or certainly not to the degree promised.
Choking off the supply chain
The biggest problem for Dollar General seems to be not having enough warehouse space to stock items to distribute to its stores. The retailer said it experienced "unanticipated delays in acquiring additional temporary warehouse space, which caused inefficiencies within the Company’s internal supply chain."
A few years ago, Dollar General brought its supply chain in-house through a pair of initiatives called DG Fresh and Fast Track. The purpose was not only to bring more fresh and frozen goods to its stores in a timely fashion, but also to implement a new distribution system in its warehouses that pack up goods for shipment based on where they will be unpacked in the store. By having employees touch the merchandise as few times as possible, it would speed up the process.
While these initiatives have helped Dollar General improve productivity since they were set up, it's clear the broader macroeconomic headwinds the discounter faces were stronger than the efficiencies it planned for, and these headwinds are raising its costs.
In particular, Dollar General experienced "materially higher" costs for things, such as late fees for shipping containers, because it had to hold onto them longer since it had no place to temporarily put its merchandise. That, in turn, led to higher temporary storage and transportation costs and labor.
Wait for a discount in Dollar General's stock
Make no mistake -- Dollar General is a solid business, and the issues it's facing are endemic to the entire country. While its 31 consecutive year run of same-store sales growth was broken last year due to the difficulty of overcoming the 16% gain in 2020, it's back on track in 2022 to resume its pattern of annual comps increases.
It's a notable achievement for a chain with such a large footprint as Dollar General to keep having customers come back again and again. Few other retailers of any size can hope to boast a similar record.
The higher sales it's seeing, which come in part from customers returning to its stores and buying more when they visit, shows they still find value at Dollar General. However, its supply chain problems mean the retailer is leaving money on the table. While this is a good long-term investment, its valuation is at a premium, and investors should wait for a better entry point.
