Walmart's Recent Outcome Indicates Trouble for This Affordable Shopping Chain
It's possible you might not be aware, but Walmart (WMT -0.92%) has subtly stood out as one of the top-performing retailers in recent years.
Indeed, over the past three years, it has surpassed leading retail stocks such as Costco Wholesale, Amazon, Target, and Home Depot, as the graph below demonstrates.
Walmart has undergone a transformation over the past decade, transitioning from a traditional brick-and-mortar retailer experiencing losses at the hands of Amazon, to a contemporary omnichannel operation offering everyday low prices and convenience to customers, while seizing opportunities in e-commerce, advertising, and India.
This strategy has proved beneficial for shareholders, as Walmart just announced another period of robust growth. In the third quarter, total revenue increased 5.5% to $169.6 billion, translating to remarkable growth across all three business divisions. In its primary division, Walmart U.S., it reported a 5.3% increase in comparable sales, driven by growth in transactions and average ticket, and also made gains in market share across all income brackets.
As the largest retailer in both the U.S. and globally, Walmart's performance holds significant implications for other retailers, particularly those it directly competes with. Its recent achievements may exacerbate the pressure on discount retailers, notably Dollar General (DG -1.75%), the nation's largest dollar store chain.
Dollar General's struggles
Just like Walmart, Dollar General is a common sight in the American retail landscape. It currently operates more than 20,000 stores, making it the country's biggest retail chain.
For a considerable time, the stock was a dependable success, with its strategy involving covering rural America with stores and offering low prices on essential items like food, beverages, and paper products in small packages, along with seasonal items and hard goods. However, more recently, the stock has faced challenges. In fact, it's now down 72% from its peak in late 2022, while Walmart has gained ground over the past three years.
In its second fiscal quarter, which ended in early August 2023, Dollar General reported a 0.5% increase in same-store-sales and a drop of 21% in operating profit to $550 million, as its gross profit margin decreased by 112 basis points to 30%. The company attributed this to increased markdowns.
Interestingly, Walmart reported a rise in gross margin in the same (non-concurrent) quarter, increasing by 42 basis points due to lower markdowns and effective inventory management.
The Walmart-Dollar General competition
Walmart and Dollar General share a significant customer base, with Walmart catering to a broader income demographic range, and both retailers competing in many of the same categories.
In 2023, consumables accounted for 81% of Dollar General's net sales, covering food, beverages, paper products, personal care products, pet products, and tobacco. At Walmart U.S. stores, grocery, which includes similar categories, made up 60% of revenue, and was an even more significant contributor at Sam's Club.
Walmart's strength in grocery has played a crucial role in its recent success, thanks to initiatives such as its online grocery pickup program and Walmart+, which have proven successful.
Dollar General lacks the ability to match these initiatives, and it seems to be negatively impacting the discount retailer and its peers, like Dollar Tree, which is less dependent on consumables than Dollar General.
Can Dollar General bounce back?
Management has attributed its setbacks to inflation and pressures on low-income consumers, and the company has acknowledged increased competitive activity within the industry, including more promotions.
The company is pinning its recovery on a back-to-basics strategy, which includes enhancing supply chain efficiency and accuracy, better in-store execution, and a focus on consumer-centric merchandising. It's implemented changes such as increasing staff presence at the front of its stores and improving in-stock levels.
Dollar General's endeavors could yield positive results, and easing inflation should also aid, but it will be challenging for the company to regain market share while Walmart is growing comparable sales at 5%.
Investors will gain further insights when Dollar General reports its third-quarter earnings on Dec. 5, but given another impressive report from Walmart, expectations for Dollar General should be modest.
Based on the text provided, here are two sentences that contain the words ['money', 'investing', 'finance']:
- Investors who were interested in retail stocks may have seen significant returns by investing in Walmart, given its robust growth over the past three years in terms of total revenue and comparable sales.
- Amidst the struggles faced by Dollar General, some financial analysts have suggested that investors might consider diversifying their portfolio by looking into other retail stocks, such as those that are focused on e-commerce or have a strong presence in the digital advertising market.
