Even dollar stores are starting to feel the pinch from inflation

By Paul R. La Monica, CNN Business

    (CNN) -- Dollar stores, as their name suggests, offer inexpensive products for bargain-hungry shoppers. But even Dollar General and Dollar Tree, which have thrived this year as rampant inflation has helped boost sales, are starting to feel the pinch of a slowing economy.

Dollar General and Dollar Tree both reported solid increases in sales for the second quarter Thursday. But both companies raised concerns about the impact that inflation may have on future results.

Dollar Tree CEO Mike Witynski said in the company's earnings release that shoppers are being "pressured by higher costs for food, fuel, rent and more." Meanwhile, Dollar General CEO Todd Vasos described the quarter as a "period of inflation and economic uncertainty."

Dollar General seems to be holding up better than Dollar Tree. Overall sales at Dollar General jumped 9% from a year ago, compared to a 6.7% rise at Dollar Tree, which also owns the Family Dollar chain.

Dollar General didn't cut its outlook, while Dollar Tree issued weaker guidance. That's likely one of the key reasons why Dollar General shares were down just 1% Thursday morning as Dollar Tree tumbled 9%.

Dollar Tree is also dealing with some customer backlash following last year's controversial decision to raise prices, a move that spurred some consumers to derisively refer to the chain as "$1.25 Tree."

But there are cracks beneath the surface at Dollar General, too. The company said in its earnings report that apparel sales plunged more than 20% from the same period last year. Sales of seasonal and home products also were down slightly.

Although those categories make up only about 20% of Dollar General's overall revenue, they have bigger profit margins than the core "consumables" business of food, beverages and drugstore items that account for the remainder of Dollar General's sales.

Witynski acknowledged this trend as well during a conference call with analysts Thursday, saying that more of the company's customers are "gravitating to needs-based consumables, which is impacting our margin."

"Consumers continue to be burdened by levels of inflation not experienced in decades," Witynski said, also noting that "our suppliers are being hit by inflation as well."

Getting products from warehouses to stores remains a problem. Vasos said during Dollar General's analyst call that there are "ongoing supply chain pressures." He added that the company is hoping to alleviate this problem by building three new distribution centers in the US.

The rival dollar store chains also announced executive moves Thursday.

Dollar General is promoting chief financial officer John Garratt to president, and retain the CFO role. Dollar Tree announced it hired a new CFO, with Jeffrey Davis taking over for Kevin Wampler. Davis previously worked at Walmart, J.C. Penney, Olive Garden owner Darden and Qurate, the parent company of HSN and QVC.

Wampler will stay on as an advisor through April. Dollar Tree had previously announced in June that he would be stepping down as CFO after activist investor Mantle Ridge pressed Dollar Tree for board and management changes.

Despite continued sales momentum at dollar stores, there are growing concerns about the health of the US consumer. Although Walmart recently posted better than expected results, the retail giant had warned in late July that it was cutting its outlook for the second quarter and rest of the year.

Walmart rival Target recently reported similarly disappointing results. And two other retailers issued poor guidance Thursday morning: apparel retailers Abercrombie & Fitch and Burlington Stores.

The-CNN-Wire
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