What happened
Shares of Dollar General (DG -0.41%) tumbled 23.6% in September, according to S&P Global Market Intelligence. The stock fell following a disappointing quarterly earnings report. Things got worse throughout the month thanks to concerning consumer data and unwelcome macroeconomic news.
So what
Dollar General reported quarterly earnings after the market closed on the last day of August, and the results weren't great. The discount retailer's same store sales fell short of expectations, which had already been revised downward.
Weak sales were compounded by other trends that squeezed profits. Customer spending shifted toward food and other basic goods that typically carry lower profit margins. That caused operating income to drop nearly 25%, even though sales rose slightly.
The company's outlook is uninspiring, too, and management expects these trends to continue or slightly worsen over the next few quarters.
Image source: Getty Images.
This isn't a problem that's specific to Dollar General although the company is clearly exposed to broader economic trends pointing to consumer weakness. Retail stocks and consumer discretionary stocks had a relatively poor earnings season, even if profits held up pretty well relative to Wall Street expectations.
Payment processors are publishing data that shows slowing transaction volumes. Credit card and auto loan delinquencies are spiking to the highest levels in years. High interest rates and high gas prices are causing serious financial problems, especially for lower-income families and workers in industries that have been hard-hit by layoffs over the past year.
That's bad news for consumers in general, and these factors are causing issues across Dollar General's peer group. Dollar Tree and Target had remarkably similar price charts last month, while the SPDR S&P Retail ETF fell further than the S&P 500 as a whole.
It looks like there are some tough times ahead for retailers and consumer companies, and investors are backing away from these stocks as a result.
Now what
There's really nothing positive to say about Dollar General's recent news, but it's important to keep things in perspective. The stock is getting crushed as investors revise their outlook, but the company still reported nearly $470 million in quarterly net profits. It's roughly breaking even in terms of cash free flow year-to-date as it invests heavily on improvements to stores and its supply chain. Dollar General hasn't changed its quarterly dividend, and the stock pays a 2.2% yield right now.
It's unlikely that the company's long-term financial prospects have deteriorated by 25% since the end of August. Margin pressure is likely to continue, but dollar stores tend to fare relatively well during recessions as price-conscious consumers shift their buying strategies to suit tighter budgets. Dollar General's forward price-to-earning ratio dropped from 17 to 13.3, so it's much cheaper relative to expected profits, even after its expectations were revised lower.
DG PE Ratio (Forward) data by YCharts
There aren't any meaningful short-term catalysts for Dollar General, but it could be an interesting opportunity for long-term value investors at this cheaper valuation.
