Walmart's Latest Result Spells Bad News for This Discount Retailer

You might not know it, but Walmart (NYSE: WMT) has quietly been one of the best-performing retailers in recent years.

In fact, over the last three years, it's outperformed top retail stocks like Costco Wholesale, Amazon, Target, and Home Depot as the chart below shows.

Data by YCharts.

Walmart has reinvented itself over the last decade from a stodgy brick-and-mortar retailer losing ground to Amazon to a modern omnichannel operation, delivering everyday low prices and convenience for customers, and finding growth opportunities in e-commerce, advertising, and in India.

That strategy has paid off for investors as Walmart just reported another round of strong growth. In the third quarter, overall revenue rose 5.5% to $169.6 billion, driving impressive top-line gains in all three of its business segments. In its biggest segment, Walmart U.S., it reported comparable sales of 5.3%, driven by transaction and average ticket growth, and it also made share gains across all income cohorts.

Walmart is the biggest retailer in the U.S. and in the world, and its performance has a big impact on other retailers, especially those it competes with directly. Its recent results are likely to put more pressure on discount retailers, in particular, Dollar General (NYSE: DG), the country's largest dollar store chain.

Image source: Getty Images.

Dollar General's troubles

Like Walmart, Dollar General is a ubiquitous presence in the American retail landscape. The company now has more than 20,000 stores, making it the biggest retail chain in the country.

For a long time, the stock was a reliable winner, with its strategy of blanketing rural America with stores and offering low prices on consumables like food, beverages, and paper products in small pack sizes, in addition to seasonal items and hard goods. But more recently, the stock has struggled. In fact, it's now down 72% from its peak in late 2022. While Walmart has soared over the last three years, Dollar General has gone in the opposite direction after a series of disappointing results.

In its fiscal second quarter, which ended in early August, Dollar General reported a same-store-sales increase of just 0.5%, and its operating profit plunged 21% to $550 million as its gross profit margin was down 112 basis points to 30%, which the company blamed on increased markdowns.

Notably, Walmart reported an increase in gross margin in its (non-concurrent) quarter, up 42 basis points due to a lower markdown and strong inventory management.

The Walmart-Dollar General overlap

Walmart and Dollar General both have a similar customer base, though Walmart has a broader income demographic range, and the two retailers also compete in many of the same categories.

In 2023, consumables made up 81% of Dollar General's net sales, which includes 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 it was an even larger contributor at Sam's Club.

Walmart's strength in grocery is a big reason for its success in recent years as investments like its online grocery pickup program and Walmart+ have paid off.

Dollar General doesn't have the ability to match those initiatives, and they seem to be taking a toll on the discount retailer and peers like Dollar Tree, which is less dependent on consumables than Dollar General.

Can Dollar General recover?

Management has blamed its struggles on inflation and pressure on low-income consumers, and the company has noted increased competitive activity in the industry, including more promotions.

The company is staking its recovery on its back-to-basics strategy, which includes improving timeliness and accuracy in its supply chain, better in-store execution, and a focus on customer-centric merchandising. It's made changes like increasing employee presence at the front of its stores and improving in-stock levels.

Dollar General's efforts could pay off and moderating inflation should also help, but it's going to be difficult for the company to reclaim market share while Walmart is growing comparable sales at 5%.

Investors will learn more when Dollar General reports third-quarter earnings on Dec. 5, but after another blowout report from Walmart, expectations for Dollar General should be muted.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Jeremy Bowman has positions in Amazon and Target. The Motley Fool has positions in and recommends Amazon, Costco Wholesale, Home Depot, Target, and Walmart. The Motley Fool has a disclosure policy.