Lower SNAP Benefits and Deflationary Headwinds Hit DG in 3Q16



Dollar General misses consensus sales estimates yet again

As discussed in part one of this series, Dollar General (DG) reported results for 3Q16 on December 1, 2016. The company’s 3Q16 top line rose 5% YoY (year-over-year) to $5.32 billion. In comparison, Wall Street was expecting a 6% increase in total sales to $5.37 billion. The company has fallen short of Wall Street expectations in 12 of the last 13 quarters. 

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Same-store sales turn negative in 3Q16

Same-store sales, an important retail metric that compares sales of stores operating for over a year, dropped 0.1%. Wall Street was expecting an increase of 0.8%. Though the company has been witnessing a slowdown in sales comps for some time, this was the first time in the last 36 quarters that comps turned negative.

How does the management justify the decline?

Dollar General’s management said its results were negatively impacted by falling food prices and a reduction in SNAP benefits. On the one hand, food stamp cuts are reducing the purchasing power of DG’s low-end customers and impacting sales. On the other hand, persistent deflation has resulted in a challenging retail environment and impacted sales comps.

“The challenging retail environment that we experienced in the 2016 second quarter continued into the third quarter, contributing to weakness in our same-store sales and our financial performance,” said Todd Vasos, chief executive officer of Dollar General. He added, “In addition, we saw an acceleration in headwinds from average unit retail price deflation and reductions in SNAP benefits in the 2016 third quarter as compared to the 2016 second quarter.”

How did Dollar General’s competitors fare in recent quarterly results?

Most of Dollar General’s competitors have also fallen short of the consensus expectations in their recently reported quarterly results. Walmart (WMT), which reported results in mid-November, saw a 0.7% YoY increase in total sales to $118.2 billion. However, it missed the consensus by $490 million. The company said that deflationary headwinds had negatively impacted its food comps by around 150 basis points.

Dollar Tree’s (DLTR) top line rose 1.1% YoY to $5 billion. The company also missed Wall Street revenue forecasts. PriceSmart (PSMT) reported a 1.7% increase in total sales to $711 million, missing Wall Street estimates by $2 million.

Together, PriceSmart, Walmart, Dollar General, and Dollar Tree make up 4.7% of the portfolio holdings of the SPDR S&P Retail ETF (XRT). XRT has exposure to about 100 stocks in the retail sector.

Read the next section to know about the company’s 3Q16 profitability and margins.


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