DLTR Dollar Tree Inc

By Sarah Nassauer 

The nation's two biggest dollar-store chains gave a downbeat assessment of the health of the nation's poorest shoppers, who are being squeezed by rising rents and health-care bills.

"I know that when we look at globally the overall U.S. population, it seems like things are getting better," Dollar General Chief Executive Todd Vasos said on a conference call. But for the chain's core shopper, "things have not gotten any better for her. And arguably they are worse."

Dollar General Corp. said sales growth in existing stores slowed to 0.7% in the second quarter from 2.2% in the preceding quarter. Mr. Vasos said changes to food-stamp programs in around 20 states this April that cut off benefits for hundred of thousands of people hurt sales, as did falling food prices and the need to compete with rivals on pricing.

At Dollar Tree Inc., same-store sales increased 1.2%, slower than the prior quarter and below analysts' forecasts. Dollar Tree CEO Bob Sasser said the consumer is facing rising costs such as rent and food. "We see them as still being under pressure," Mr. Sasser said. "I think that's the No. 1 issue that we see out there."

The rare disappointment in the two chains' financial results took a toll on their stocks. Shares of Dollar General fell 16% to $77.40, while Dollar Tree shares declined 9.4% to $86.

Dollar stores have been a relative bright spot in a troubled retail sector as recession-weary shoppers flocked to their low prices and convenient locations near residential areas. The two chains have been growing rapidly as others retrench. Dollar Tree acquired rival Family Dollar last year for about $9 billion. Dollar General is adding thousands of stores, aiming to have 20,000 shops by 2020, up from 13,000.

But improving operations at Wal-Mart Stores Inc. are likely putting pressure on the retailers. Last week Wal-Mart reported its eighth straight quarter of sales growth in existing stores, with a 1.6% gain. Executives have said the world's largest retailer by revenue is beginning to invest billions to lower prices on some products, forcing smaller players to do the same.

"I believe everyone knows some of the retailers that are working price right now," Dollar General's Mr. Vasos said without naming Wal-Mart. To fight back, the dollar chain has lowered prices by an average of 10% on hundreds of best-selling products in 2,200 of its stores. "For our core consumer, price is everything."

Both chains have been seeking ways to drive traffic and fend off competition from online retailers or massive Wal-Mart stores often on the outskirts of town. Dollar General has said it would add more fresh foods and health and beauty products to its aisles. Dollar Tree has highlighted more seasonal items like decorations and gifts. Both are rapidly expanding.

But declining food prices hit Dollar General. The retailer said prices for everything from milk and eggs to sugar and coffee hit its sales growth, a trend executives forecast will continue through the end of the year. "As we all know, the consumers don't consume that much more just because the price is a little less expensive," said Mr. Vasos.

In all, Dollar General reported a profit increase of 8.5% to $306.5 million, while revenue rose 5.8% to $5.39 billion. Meanwhile, Dollar Tree reported a profit of $170.2 million, compared with a year-earlier loss of $98 million, helped by the Family Dollar acquisition. Revenue increased to $5 billion from $3.01 billion.

--Joshua Jamerson and Lisa Beilfuss contributed to this article.

Write to Sarah Nassauer at sarah.nassauer@wsj.com

(END) Dow Jones Newswires

August 26, 2016 02:48 ET (06:48 GMT)

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