Dollar General shoppers are pulling back on discretionary purchases, hurting the retailer's earnings.
Smaller tax refunds and inflation are some of the reasons why, its CEO said Thursday.
Dollar stores have previously fared well during economic shifts.
Even the US's largest chain of dollar stores is feeling the pinch as consumers pull back on spending.
Dollar General's typical consumer "is under greater pressure than we have seen in quite some time," CEO Jeffrey Owen said on the company's first-quarter earnings call on Thursday.
The retail chain cut its outlook for same-store sales for all of 2023. It also said that earnings for the year will be flat or down up to 8% over last year. Dollar General previously said that it expected earnings to rise as much as 6% for the year.
The reason for the change: Dollar General's already budget-conscious shoppers are pulling back. Owen said that tax refunds were lower than expected. That gave Dollar General shoppers less fun money to spend than expected.
As a result, many patrons drew down spending on discretionary items, a category that includes non-essential products like electronics and toys, Owen said. Instead, that money went to essential purchases like food and household goods. While Dollar General is expanding its selection of fresh groceries and other food items, those products tend to be less profitable for the retailer than discretionary items.
Additionally, Owen said, "we continue to see signs of increasing financial strain on our customers as they seek affordable options, including increased reliance on private brands and items at or below the $1 price point."
Shares of Dollar General were down nearly 20% at $161.31 in midday trading after the company reported earnings.
The earnings report shows that Dollar General isn't immune to changes in consumer spending, despite the fact that it has handled recent economic shifts well. The chain and other value-focused rivals, such as Dollar Tree, reported better-than-expected results over the last year even as inflation hurt other retailers.
Last fall, former CEO Todd Vasos said that the chain was even attracting new customers looking for deals, including some who made at least $100,000 a year. Dollar General's typical target customer earns about $40,000 a year.
On Thursday, Owen said that Dollar General has indeed attracted more high-earning customers. But he added that their impact won't have a significant effect on the company's results for 2023.
In urban areas, shoppers have better options for trading down, such as Walmart or club retailers like Costco and Sam's Club, according to John Tomlinson, global director of research at M Science.
"The trade-down theme is an easy one for people, but it really depends on store location, density, and the level of the e-commerce business," Tomlinson said in an interview with Insider.
Dollar General is also reducing the number of Popshelf stores it plans to open this year to 230, down from 300, Owen said. The company has positioned Popshelf as a store for younger, higher-earning suburbanites, a contrast to the target demographic of the company's namesake chain.
It's also "doubling down" on its locations in rural areas, he said. "This company was founded to serve the underserved, and today, approximately 80% of our stores, many of which are in rural America, serve communities with fewer than 20,000 residents," Owen said.
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