Dollar General just showed how bad things are for budget-conscious shoppers

• Dollar General's stock plunged nearly 30% after it reported worse-than-expected quarterly results.
• It's a sign of how dire things have become for low-income shoppers.

Things are getting worse for US consumers, and Dollar General is suffering as a result.

The dollar store chain reported second-quarter comparable sales below analysts' expectations on Thursday. Dollar General also cut its sales growth expectations for the rest of the year, warning that its low-income customers have pulled back spending — and that things could get even worse.

The quarter included a "weaker sales environment for our core consumer than we anticipated," CEO Todd Vasos said on the earnings call. About 60% of Dollar General's customers come from households with annual incomes of less than $35,000.

The company's shares plunged as much as 30%.

But it's not just Dollar General suffering. Competitor Dollar Tree also dropped about 10%. The reason: the news challenges a widely held assumption that dollar stores do well in any economy. Vasos told investors on an earnings call four years ago: "We do very good in good times, and we do fabulous in bad times." The 2008-era economic downturn was a case in point, with many middle-income consumers turning to dollar stores in hopes of saving money. But that doesn't appear to be happening — at the moment.

Dollar General's key customers are stretched, Vasos said, citing a company survey. About 30% of respondents said they've maxed out at least one of their credit cards, while 25% said they expect to miss a bill payment in the next six months.

Sales at Dollar General's stores slowed down particularly at the end of each of the last three calendar months, Vasos said, a sign that consumers are increasingly stretching their income to make it through to the next payday.

"The majority of them state that they feel worse off financially than they were six months ago" due to higher prices, softer employment levels, and increased borrowing costs, he commented.

Foot traffic data suggest that customers are still coming into Dollar General stores, Vasos said. But they're spending less, especially on nice-to-have items like home decor, and focusing instead on buying essentials like food as well as some of the roughly 2,000 items priced at $1, he added.

In response, Dollar General is cutting prices on more items. While that stands to increase what consumers spend at the retailer, it's likely to weigh on financial results for the rest of the year, executives said.

Dollar General's troubles aren't entirely about the economy, though.

The chain has spent the last year trying to improve its operations, including by reducing excess inventory sitting around its stores and reducing lost inventory, including from theft.

Dollar General has also seen stiffer competition from other retailers, including Walmart. The Bentonville, Arkansas-based retailer posted much stronger results earlier this month; execs said that they haven't seen the slowdown in consumer spending that others have.

Walmart's success appears to have eaten into Dollar General's results, Vasos said on the call. "The guys down in Bentonville are doing a pretty nice job in garnering the available traffic that's out there from other retailers," he said.

And these days, middle-class consumers don't appear to be trading down to dollar stores at a fast enough rate to make up for low-income consumers pulling back their spending, said Brian Yarbrough, a senior analyst at Edward Jones.

While more affluent shoppers are trading down and looking for deals — by shopping at off-price retailers like Nordstrom Rack, for example — many aren't strapped enough to take the next step and shop at dollar stores, he said in an interview. Other retailers and big brands like McDonald's have made similar observations in their latest earnings reports.

"I would assume Dollar General is suffering the same fate at this point," Yarbrough said.

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