Dive Brief:

• Dwindling grocery prices and reduced food stamp coverage combined to drive Dollar General's same-store sales down 0.1% in the third quarter, badly missing Consensus Metrix analysts expectations for an 0.8% increase and sending shares down 7.6% in premarket trading Thursday.

• Dollar General's net income plunged to $235.3 million or 84 cents per share from $253.3 million or 86 cents per share in the third quarter of 2015, missing Thomson Reuters I/B/E/S analyst expectations for 93 cents per share.

• Net sales rose 5% to $5.32 billion, beating the average analyst estimate of $5.37 billion.

Dive Insight:

Following similarly disappointing second quarter results, Dollar General announced bold steps to cut prices in order to drive sales and customer traffic, with an emphasis on its core lower-income customer segment. Cuts to the Supplemental Nutrition Assistance Program in as many as 22 states this year means that a million Americans will likely lose their food assistance benefits: For Dollar General, the problem is especially acute because SNAP changes were prevalent in many of the southern states in which it has the most stores.

In a statement released Thursday, Dollar General CEO Todd Vasos noted the “challenging retail environment” but said that efforts to keep prices low are gaining traction with customers.

“We saw an acceleration in headwinds from average unit retail price deflation and reductions in SNAP benefits in the 2016 third quarter as compared to the 2016 second quarter," Vasos said. "We are focused on efforts to drive traffic in our stores and to control the factors we can control as we look to overcome the issues impacting our results, many of which we believe are macroeconomic and transitory in nature.”

Fierce competition from Wal-Mart is also hitting Dollar General and rival dollar stores hard, meaning the retailer will be facing a “new era of slower growth and tougher competition,” Conlumino retail analyst Håkon Helgesen said in a note emailed to Retail Dive.“Following on from a soft second quarter, Dollar General has posted another lackluster set of numbers,” Helgesen said. “The biggest disappointments come from the comparable sales number — which has just dipped into negative territory — and net income, which is down by 7.1%. The results are also in marked contrast to rival Dollar Tree, which is now firing on all cylinders thanks to the successful integration of Family Dollar.”

While Conlumino agrees with Vasos that the retail environment is tough, Helgesen said Dollar General also must correct some internal problems to meet its competition head on, especially considering mounting evidence that Wal-Mart is taking significant market share.

“As much as external factors have been unhelpful, Dollar General’s store expansion has also contributed to the comparable sales decline,” Helgesen said. “While we are generally positive about the company’s fleet growth, we maintain our view that there are a number of locations in which the trade area overlaps of stores are too great. This is now showing up more in the results as those stores mature and as external growth becomes more difficult to attain. Fortunately, current new openings seem to be more sensibly placed and we believe these will continue to drive up total sales over both the short and longer term.”