Why Dollar General Stock Fell With Its Latest Earnings Release

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Dollar General's (NYSE: DG) recent second quarter earnings report provoked a quick thumbs-down from shareholders.

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In this segment from an Industry Focus: Consumer Goods episode devoted to the grocery and dollar store industries, we uncover the reason behind the sell-off and how it fits within investors' current narrative on prospects for these discount chains.

A full transcript follows the video.

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This video was recorded on Sept. 5, 2017.

Vincent Shen: Alright, Asit, we talked about doom and gloom a little bit here for Kroger and some of the other big grocery stores in the first segment. I want to flip it around now. The increasingly low pricing that these companies have had to offer to draw in customers should potentially also shrink the moat and take some of the luster away from another corner of the retail space, and that's discount retailers and dollar stores. Dollar General leads this corner. Competition, we're starting to see it manifest itself in the company's results. They just reported today.

Asit Sharma: Yeah. Dollar General reported earnings that looked great on the surface. Sales were up 8.1%, same-store sales were up 2.6%, and this is in an environment where most grocery store chains and discount food chains are showing flat comps or negative comps. So I thought those were great results. But the stock is getting beaten up in the market today. I saw it early this morning, I think Dollar General was down 7%. Shortly before we went on air to tape, it was down about 5%. The reason -- the company gave up 1% in operating margin to achieve those results. And I think that's a really great illustration of what's going on in the grocery sector in general, and why these two sectors are lumped together.

Most dollar stores have the preponderance of their sales in consumables, in food. I think for Dollar General recently this year, about 76% of its total sales are related to consumables. So what happens in the grocery industry obviously affects these companies. Dollar stores have found that they can indeed raise their revenue by opening a lot of stores, by enticing customers in. So they've been able to stick around, surprisingly, in the face of all this competition. But they're having to give up margin to do it, to use promotional discounts to get those sales.

Asit Sharma has no position in any of the stocks mentioned. Vincent Shen has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.