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Why Dollar General Could Thrive in Inflation’s ‘Retail Ice Age’

Inflation is “much too high,” Federal Reserve chair Jerome Powell said Monday, confirming fears that rising prices threaten America’s economic engine.

The Fed on Wednesday approved the first interest rate hike since December 2018 for a 25-basis-point increase and plans six similar hikes this year.

Powell’s National Association for Business Economics speech comes after the nation’s influential banking sector last month warned that red-hot inflation and concerns about its effect on credit could render assets like real estate and stores worth less than their previous value, potentially hurling the economy into a recession and clamping down on M&A.

The current environment harkens back to the inflation-ravaged ’70s and could lead to hard-to-stomach sticker shock for consumers who didn’t live through a time that forced many people in America to resort to rationing gas. But value chains like Dollar General could gain customers looking to make their paycheck stretch as far as possible as prices on a range of everyday goods march up, up and away.

The big picture

For now, geopolitical turmoil, namely Russia’s war in Ukraine, remains the biggest variable shadowing the global economic outlook, with ripple effects across the supply chain resulting in higher consumer prices.

Wholesale suppliers like General Mills, Unilever, Kraft Heinz, Procter & Gamble and Mondelez have already have raised food prices this year, with more increases potentially in the pipeline. In the U.K., Primark parent Associated British Foods (ABF) said high energy and raw materials costs will also force it to raise food prices. However, ABF CFO John Bason told the BBC that “locked and loaded” pricing means Primark won’t charge more for spring/summer merchandise to offset inflation. It’s too soon to say what to expect with prices for fall/winter fashion merchandise.

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For now, “the majority of consumers view the economy as already in a weakened state,” said Richard Curtin, an economist at the University of Michigan and the director of surveys, finding that consumer confidence in government economic policies has plummeted to its lowest level since 2014. That means many might not trust the Fed’s plan to gradually boost interest rates to curb inflation.

Curtin tracks the university’s consumer sentiment index, which has been on the decline since the year started. Data from the most recent February survey showed the index falling to 62.8 from 67.2 in January, and well below the 76.8 year-ago level. More importantly, the expectations component measuring the six-month consumer outlook dropped to 59.4 in February from 72 in January. Curtin said inflation’s impact on household finances, rising rates and fading confidence in government’s economic approach have contributed to the most negative long-term prospects for the economy in the past decade.

“The Russian invasion of Ukraine is likely to increase inflation and job losses. This makes the task of the Fed even more challenging,” Curtin said. “Accelerating inflation has caused financial harm and growing angst among consumers, and prospects for retaliatory cyberattacks could cause added concerns about jobs and access to household funds.”

Curtin believes the Fed should move to nip inflation in the bud. “Even more aggressive actions are now needed to avoid the establishment of an inflationary psychology that can act as a self-fulfilling prophecy,” he added.

Dollar General

Given all the uncertainty many U.S. consumers are feeling, Dollar General could pick up new shoppers as it plans to increase its $1 assortment and open 1,000-plus new stores.

Dollar General usually begins to see consumers start to “trade down” when hard times hit, CEO Todd Vasos told Wall Street analysts in a conference call Wednesday, citing gas prices averaging over $4 that will keep many people closer to home. Inflation, he added, has chipped away at any growth in wages.

The retailer is leaning into the $1 value proposition and “really pushing that side of the business, because I think our customers will need us even more there,” Vasos said. About 20 percent of the merchandise is priced at $1 dollar, and the company is working with vendors to raise that percentage. 

“We haven’t seen a lot of trade down yet,” Vasos said, but he expects “there’ll be more as inflation comes in.” The company picked up scores of new shoppers when the pandemic first hit many consumers’ finances.

“We know that based on the credit card data, and our marketing against that, a lot of these customers are in that trade down area that would happen when trade down occurs, so we’ve got some of them already and I believe will get even more as inflation continues to take hold across the U.S.,” Vasos said.

For the fourth quarter ended Jan 28, Dollar General’s net income fell 7 percent to $597.4 million, or $2.57 a diluted share, on a net sales gain of 3 percent to $8.65 billion. For the year, net income fell 10 percent to $2.4 billion on a net sales gain of 1 percent to $34.22 billion.

Looking ahead to the first quarter ending April 29, the dollar store expects a same-store sales decline of 1 percent to 2 percent. The company expects elevated cost pressures and ongoing supply chain disruptions to continue in the quarter. For the year, the company projects net sales growth of 10 percent, with same-store sales growth of 2.5 percent. Full-year guidance includes plans to solidify Dollar General’s presence across the retail landscape with 1,110 new store openings, 1,750 remodels and 120 store relocations.

Looking ahead

The National Retail Federation on Tuesday said retail sales, including online, could reach 6 percent to 8 percent in 2022, or $4.86 trillion to $4.95 trillion. On Wednesday, however, the Commerce Department’s February’s retail sales report showed just 0.3 percent growth.

That projection reflects “a lot of moving parts,” including inflation and geopolitical instability, NRF chief economist Jack Kleinhenz added.

Patrick McKeever, former Wall Street analyst and founder of the research product The Daily on Retail, believes it’s not wise to second guess the U.S. consumer and consumers’ ability to continue spending, he told attendees at a Retail Marketing Society presentation on Wednesday. “However, I would say right now there are a good number of red flags for the consumer and for retail,” he added.

In some ways, last year was a study in contrasts. Retail sales roared back from a 2020 pandemic slump as economies reopened and federal stimulus checks coupled with healthy savings accounts and pent-up demand for new fashion encouraged many consumers to shop. And many retailers got away with raising prices to counter inflation because wage gains plus supply shocks limiting available inventory meant consumers were incentivized to get what product they could, McKeever pointed out.

But now that inflation is doing an about-face from tailwind to worrying headwind, retailers should keep an eye on rising gas prices averaging about $4.40 per gallon nationwide, or “up about a buck-fifty from this time a year ago,” he cautioned. That means consumers guzzling 20 gallons of gas a week lose $30 in discretionary power, which really affects “lower-income” households, McKeever said.

Burt Flickinger, managing director of Strategic Resource Group, a retail consulting firm, told Yahoo Finance hosts that inflation could spell a new “retail ice age.” Though many retailers have pulled up their prices, he sees some having trouble convincing consumers to pay more. And with online sales slowing, plus other retail categories lagging—sales of electronics are down and people are putting off buying new appliances—Flickinger said the industry might be in for a “pronounced retail recession as we get into the fourth quarter.”