Dollar Stores Aren’t Escaping Inflation

Traffic was down at Dollar General and so were same-store sales last quarter.

March 21, 2022

Dollar General Store

ALEXANDRIA, Va.—Dollar stores are feeling the effects of inflation, reports the Wall Street Journal. The channel typically thrives during troubled economic periods, but record-high inflation is starting to take a hit on dollar stores’ bottom lines.

Dollar General saw same-store sales decline 1.4% in the fiscal fourth quarter ended January 28 over the previous year, despite a rise in average basket size. Inflation did have an impact on the basket amount, but shoppers also bought an additional item on average compared with pre-pandemic levels. The average basket size was $16 for six items at the end of 2021, compared to five items at $13 at the end of 2019.

Inflation is hitting Dollar General on gross margin, down 31.2% in the fiscal fourth quarter, a decline of 1.3 percentage points from a year earlier. It’s also affecting the chain’s capital expenditures, as higher steel costs are expected to make new store openings costlier. Capital expenditures are expected to be 4% of Dollar General’s revenue, compared to its typical range of 2.5% to 3%.

The Journal reports that it’s unclear how inflation will affect the economic health of low-income consumers, which comprise Dollar General’s core customer base. With inflation outpacing wage growth for more than a year, and federal stimulus payments and expanded tax credits now over, analysts agree there is pressure on low-income consumers, but analysts are divided on what that means for dollar stores.

Bullish analysts say consumers looking to stretch their dollar could boost dollar store traffic. (The discount retailer reported that traffic declined in the fourth quarter.) High gasoline prices would keep consumers closer to home, and dollar stores tend to located closer to residential areas and in more rural areas, compared to bigger retailers.

Other analysts are looking back at the 2007-09 recession, when low-income consumers started getting squeezed first by sharply rising food and gasoline prices. By the end of 2007, same-store sales at dollar stores had declined, and then when unemployment levels went up in 2008, affecting higher-income consumers as well, dollar stores sales went up.

Dollar General, however, remains optimistic. During its fourth-quarter earnings call, the company said it expects net sales to rise about 10% this year, and comparable sales to rise about 2.5%, reports Modern Retail. It also raised its quarterly cash dividend by 31%. The company still plans to open 1,110 new stores, which include roughly 100 new pOpshelf store openings, and remodel 1,750 locations. The company recently announced it will create about 10,000 net new career opportunities in fiscal 2022 through new store, distribution center and private fleet growth.

U.S. inflation is the highest it has been in 40 years, and companies across the country have raised prices to offset rising costs with little to no resistance from consumers. However, the Journal reports that the trend is starting to shift.

Compared with February 2021, overall retail sales were up 17.7%, but that’s mostly because of increased prices. Forty-three percent of consumers surveyed by NPD in February said that if prices continue to rise, they will delay less-important purchases to stick to a budget.

Gas stations led U.S. retail sales gains in February, with sales up 5.3% compared with January as overall retail sales showed a seasonally adjusted 0.3% increase last month compared with January, according to retail sales data for February released by the U.S. Commerce Department.

Get an overview of NACS benchmarking data on the convenience and fuel retailing industry’s performance in 2021 and a look ahead at the NACS State of the Industry Summit, April 12-14 in Chicago.