What happened
Shares of Dollar General (NYSE: DG) are down 13.3% so far this week, according to S&P Global Market Intelligence. There wasn’t any news from the discount retailer, but poorly received earnings reports from other retailers like Target and Walmart made investors sell off the entire sector, and Dollar General was not immune.
So what
Earlier this week, both Target and Walmart reported their latest quarterly results. Their financials didn’t look horrible, but both companies gave commentary about weakening consumer demand starting in March.
Specifically, Target said that it is battling a huge decline in demand for home goods, apparel, and hard lines (like furniture, appliances, tools, and electronics), combined with a gigantic increase in freight costs that are weighing on margins. It also doesn’t help that it is trying to pass through inflationary costs from a lot of its suppliers.
Image source: Getty Images.
Walmart’s report was less bearish, but it said customers are refraining from more purchases on discretionary items because of higher food and gasoline prices. Like Target, it is seeing profit margins move in the wrong direction because of inflation and supply chain costs.
Weak consumer wallets are not a bad thing for Dollar General (it targets people who need to get products at a bargain price), but it will likely see these rising input costs weigh on its profit margins in the short term.
That’s not to say that the drop is entirely warranted for every retailer. For example, online fashion retailer Revolve Group saw its stock drop as much as 10% this week even though Target said that people are spending on items for out-of-home gatherings, which is Revolve Group’s target market. So don’t think Dollar General is in trouble just because another company gave out poor commentary about the operating environment.
Now what
In some ways, I get why Dollar General traded in line with other retailers this week. But in other ways, it doesn’t make sense. It is understandable that investors would get bearish on all retailers due to margin pressure, especially because these are all low-margin businesses to begin with.
But I do not get why investors would be bearish on Dollar General over the long haul if an inflationary/recessionary environment hurts consumer spending power. These trends would drive more customers out of the higher-priced stores to Dollar General.
The company is already experiencing margin pressure, with operating margins decreasing from 10.37% to 9.21% year over year last quarter. But over the long haul, if and when inflation and supply costs are reined in, Dollar General could be in a better position with more customers visiting its stores. The only question is how long that will take.
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Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Revolve Group Inc. The Motley Fool has a disclosure policy.
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