A funny thing happened this week. Or you might call it a very unfunny thing if you own the equity or are a low-income consumer.
Shares of Dollar General fell precipitously after the discount retailer reported weaker-than-expected comps for Q1 and slashed its full-year sales and profit forecasts in what one bank called a “surprisingly poor” update.
Company analysts debated the “real” cause of the disappointing report, but if we take Dollar General at its word, the key issue is the macro environment and the impact it’s having on the company’s “core customer.” At the risk of accidentally offending anybody, “core customer” in this context just means people with very little money.
On the call, CEO Jeff Owen said the following:
Overall, we had softer-than-expected sales in the quarter, which we believe was primarily driven by a deterioration in the macroeconomic environment, including headwinds from lower tax refunds than customers expected and reductions in SNAP benefits.
Regarding tax refunds, we believe our customers were caught off guard by the reduced amounts, which exacerbated the inflationary pressures they were already experiencing.
We did not see a notable sales impact in states that eliminated the emergency [SNAP] allotment early. However, in the states where reductions occurred in March of this year, we have seen an impact on sales, as our customers appear to primarily have reduced the size of their basket instead of using other forms of tender to complete their purchases at the same level.
Additionally, these and other customers appear to be shopping closer to payday.
If you’re unfamiliar with the SNAP backstory, you can find it here. Long story short, changes to benefits enacted during the pandemic lapsed, and that obviously impacted the finances of families relying on the larger allotments.
The market wasn’t enamored with Dollar General’s report. And that’s an understatement.
As you might’ve heard, the stock suffered its largest single-session selloff in history, falling nearly 20%.
If you’re rich, and you don’t own the shares outside of an ETF or mutual fund, you might be wondering why you should care. The callous answer is that you probably shouldn’t. Care, I mean. But let’s pretend we’re not all callous.
One reason to care is that the juxtaposition between Dollar General and big-cap US tech (which is spiraling higher on A.I. optimism turbocharged by the notion that even if we haven’t seen peak Fed funds yet, the FOMC is one hike away from terminal at most) could be viewed as a manifestation of the familiar, post-GFC inequality dynamic wherein financial asset bubbles stood in stark contrast to mostly stagnant wages and other signposts of a Main Street malaise that’s existed in one form or another for the better part of four decades.
Nvidia is up nearly 200% in 2023. Dollar General is down more than 30%.
Note the inherent peril. Main Street’s relative demise accelerated in the aftermath of the 1980s inflation as a consequence of shareholder capitalism and globalization’s many Faustian bargains. Now, in 2023, we may be on the brink of seeing Main Street deterioration both in relative terms and in absolute terms.
If the Fed countenances another equity bubble and that ignites animal spirits through the wealth effect channel, it could keep inflation “higher for longer” (pardon the policy pun) with the effect of blunting hot nominal wage growth, which was anyway cooling down.
As a reminder, wage growth has been consistently negative in real terms during the pandemic. For real wage growth to turn positive with the pace of nominal gains receding, inflation has to recede too. A good way to ensure inflation doesn’t recede is to tolerate asset bubbles like the one percolating in the Nasdaq 100.
Remember: Dollar General shoppers don’t own any stocks, certainly not relative to people who don’t shop at Dollar General, and maybe not at all. The figure below is updated with the latest Fed data, current through Q4 2022.
Equity gains accrue to the wealthy, and they do so exponentially. Only the top 1%’s share has grown since 1989. That’s not a coincidence, but at the same time, it’s not a “conspiracy” either. We designed this system and we continue to worship it with something approaching religious zeal.
This all speaks to what I’ve (somewhat hyperbolically) described as modern day serfdom in America’s services-based society. There are no manufacturing jobs anymore, and when the wealthy aren’t buying Flying Spurs and Hermès ties, they’re spending on services and “experiences.” Those services and experiences are provided by low-wage workers who shop at Dollar General when they’re not serving mimosas to the Birkin bag crowd.
Weighing in Friday on the juxtaposition between the tech rally and Dollar General’s rough week, Nomura’s Charlie McElligott warned that a Fed which abides a new equity bubble “will only risk ‘sticky inflation’ issues down the road on top of a ‘financial asset holder’ inequality gap explosion versus the low-end US consumer getting torched on inflation.”
Commenting further on the company’s analyst call, Owen said Dollar General’s customers are “under greater pressure than we have seen in quite some time.” “We continue to see signs of increasing financial strain as they seek affordable options, including increased reliance on private brands and items at or below the $1 price point,” he added.