Dive Brief:

• Dollar General reported weaker-than-expected second quarter 2016 sales growth on falling traffic, food stamp declines and increased competition in some locations. Same-store sales rose 0.7%, compared to analyst expectations from Consensus Metrix for a 2.6% increase. Shares dropped 7.4% in pre-market trading.

• Similarly, shares of rival Dollar Tree fell more than 7% in pre-market trading on its own Q2 sales miss. Same-store sales rose 1.2% on a constant currency basis and 1.1% when adjusted for currency fluctuations, missing the FactSet consensus expectations of a 2.4% increase. The dollar store retailer reported Q2 earnings of $170.2 million, or 72 cents per share, up from a loss of $98.0 million, or 46 cents per share year over year, shy of the FactSet consensus for 73 cents per share.

• Dollar Tree CEO Bob Sasser said his company is progressing after its acquisition of Family Dollar a year ago, but both Sasser and Dollar General CEO Todd Vasos stated that a challenging retail environment hurt sales. 

Dive Insight:

The dollar stores’ misses were something of a surprise considering that both Dollar General and Dollar Tree thrived as other retailers faltered during the lean recession years. Consumers’ increased willingness to spend as the economy has improved has only boosted their fortunes in recent quarters. 

Dollar General and Dollar Tree have enjoyed support from a range of consumers. Lower-income Americans, their wages finally rising somewhat, seemed to be spending more, and many wealthier Americans, especially thrifty millennials, like the low prices and the high quality of their respective store brands. 

But Dollar General and Dollar Tree apparently aren’t impervious to the kinds of competitive challenges that have hurt many other retailers, including competition from Amazon. And Wal-Mart’s successful effort to win back many customers is likely hurting dollar stores as well.

Finally, the fact that cuts in food stamp benefits in many states was worth a mention from Dollar General's Vasos shows that many Americans continue to struggle, even in a healthier economic setting.

“Retail food deflation and a reduction in both [Supplemental Nutrition Assistance Program] participation rates and benefit levels, coupled with unseasonably mild spring weather, proved to be stronger than expected headwinds to our business,” Vasos said in a statement. “The competitive environment also intensified in select regions of the country.”

Meanwhile, Dollar Tree continues to work on folding Family Dollar stores into its network. In the second quarter, the company opened 156 stores, expanded or relocated 52 stores, and closed 17 stores. Dollar Tree also opened 47 former Family Dollar store locations as new Dollar Tree stores, and converted its remaining 32 Deals stores to Dollar Tree locations. 

Sasser said that Dollar Tree is focused on cutting costs, and that it’s continuing to clean up stores and improve assortments, something it will have to do as competition in discount retail heats up. “The stores are cleaner, the values are greater and our merchandise assortments are improving,” Sasser said in a statement. “Additionally, we are taking the necessary steps to develop our shared services support model, and are continuing our focus on cost-related synergy capture.”