What happened
Dollar General (DG -0.41%) shareholders saw red last month. The stock declined 16% in June, according to data provided by S&P Global Market Intelligence. That's as compared to a 6.5% rally in the S&P 500. Shares of the retailer have been having a rough year so far, too. They're down 31% in 2023 even as the wider market has rallied.
The June decline was sparked by an earnings update that left most investors wanting more.
So what
Dollar General announced early in the month that sales were up a modest 2% at existing locations and rose 7% overall after accounting for new store growth. That result marked a slowdown from the prior quarter, which featured 18% higher net sales.
On the bright side, the company notched higher gross profit margin thanks to increased prices and reduced cost inflation. Unfortunately, these gains were more than offset by higher administrative and selling expenses. Overall operating profit declined by 1% to $741 million. "The macroeconomic environment has been more challenging than expected," CEO Jeff Owen said in a press release.
Now what
Investors weren't thrilled to hear management reduce its sales growth outlook. Revenue is now on pace to rise by between 3.5% and 5.0%, compared to the prior target of roughly 6%. The earnings outlook was lowered slightly, too, and Dollar General is reducing its spending plans in areas such as capital investments and stock buybacks. "We are controlling what we can control," Owen explained.
This update suggests that Dollar General might face a period of pressure on the business as its shoppers look to save cash. There's little danger of the business losing money, though, thanks to its high profit margin.
That's why the current cyclical downturn isn't material to the long-term investing thesis for the stock. Like all retailers, Dollar General endures changes in demand as consumers' preferences shift. Keeping costs low, as management is doing today, will help lay the groundwork for an earnings rebound once the next upturn begins.
