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Dollar General (DG -28%) is sharply lower after reporting an EPS miss in Q2 (Jul) following three beats. Revenue rose 4.2% yr/yr to $10.21 bln, but that also was below expectations. Even more eye-opening was its significant reduction in full year EPS guidance to $5.50-6.20 from $6.80-7.55. That was way more than its Q2 downside, which implies significant downside for Q3-Q4 and it implies weak margins. DG also lowered its full year sales outlook.

• The company said it made important progress on its Back to Basics plan in Q2 and it was able to drive positive traffic growth in Q2. However, the company conceded it was not satisfied with its Q2 results. DG said the softer sales trends are partially attributable to a core customer who feels financially constrained. In response, DG is taking action to further enhance its value and convenience offering.
• Same store comps in Q2 were weak at just +0.5%, which was below internal expectations. It was also down from +2.4% in Q1 (Apr) and +0.7% in Q4 (Jan). Comp growth was driven by an increase in traffic, partially offset by a decrease in average transaction amount. By product category, Q2 comps included growth in consumables, partially offset by declines in seasonal, home, and apparel categories. The company also lowered full year comp guidance to +1.0-1.6% from +2.0-2.7%.
• Comps were strongest in June before turning negative in July. Notably, the three softest comp sales weeks of the quarter were the last week of each of the calendar months. DG says this pattern suggests that customers are less able to stretch their budgets through the end of the month. DG's core customer (60% of sales) comes predominantly from households earning less than $35,000 annually.
• Another issue is shrink (retail theft). On its last call, DG said that shrink has been the most significant headwind in its business. The company has been taking steps to reduce shrink in its supply chain, merchandising, and within its stores. For example, its supply chain teams are focused on ensuring deliveries are on time and in full. Within its stores, DG has been removing high-shrink SKUs and eliminating self-checkout in the vast majority of stores.

Overall, times are tough right now for the dollar stores because their core customer is lower income, and they are feeling the inflation pinch more acutely than other income cohorts. Also, Dollar General said it's seeing increased promotional activity, which has pressured sales and gross margins. DG expects this will likely continue for the duration of the year. We suspect that had a lot to do with the significantly lowered EPS guidance.

On a final note, we are getting close to it being a year since Todd Vasos returned as CEO. DG was able to lure its former CEO out of retirement to take his old job back, effective October 2023. Mr. Vasos was CEO from June 2015 to November 2022 when DG was posting strong results. Mr. Vasos has been making changes, but it's clear that turning Dollar General around will take some time.