Dollar General (DG) said Thursday its profit margins narrowed in the second quarter, stoking fears that it was cutting prices more aggressively to better compete in a retail industry altered by Amazon’s purchase of Whole Foods Market.
Shares of Dollar General fell 4.3 percent to $73.40 in premarket trading despite the discount retailer’s better-than-expected comparable sales, which were driven by the first increase in customer traffic in five quarters.
Amazon (AMZN) closed its $13.7 billion acquisition of upscale grocer Whole Foods on Monday and rushed to slash prices on items such as avocados and apples as it sought to match the low prices of Wal-Mart Stores (WMT) and Kroger (KR).
“The fear around this right now is that Amazon buying Whole Foods is going to lower prices, which will cause Wal-Mart and Kroger to lower, which is going to cause impact on Dollar General,” Edward Jones analyst Brian Yarbrough said.
“In this environment, people sell first and ask questions later,” Yarbrough added, referring to Dollar General’s stock decline.
Dollar General reported a 47-basis-point decline in gross margin to 30.7 percent in the quarter ended Aug. 4, mainly due to higher discounting. Yarbrough had expected a 35-basis-point decline. A basis point is one-hundredth of a percent.
The retailer’s comparable-store sales rose 2.6 percent, topping the 1.6 percent expected by analysts polled by Consensus Metrix.
Traffic to Dollar General’s stores rose after four straight quarters of declines, that were partly driven by reduced food stamp coverage in several U.S. states as well as lower prices offered by Wal-Mart and other retailers.
However, Dollar General and larger rival Dollar Tree (DLTR) have held their own as customers including well-to-do millennials increasingly shop at dollar stores for quick fill-in trips or store-branded toiletries and party supplies.
Tennessee-based Dollar General sells most of its products at $5 or less.
The company’s second-quarter net income fell 3.8 percent to $294.8 million. On a per-share basis, net income was flat at $1.08 as the company had fewer shares outstanding.
Excluding one-off items, Dollar General earned $1.10 per share, edging past analysts’ average estimate of $1.09, according to Thomson Reuters I/B/E/S. Net sales climbed 8 percent to $5.83 billion, beating analysts’ expectations of $5.80 billion.