Rundown: Dollar General and Lululemon show signs of weakness, Foot Locker scales back

0:03Hey, everyone. Welcome back to the Modern Retail Rundown. I am your host, Gabby Barco, and I'm here with our editor in chief, Kale Guthrie Weissman. Hey, Kale. How are you today? I'm doing well. Good morning, Gabby. How are you? Good morning. I'm well. Yeah, we're just celebrating the end of summer, I guess. I know. I feel like I did nothing this summer, and now we're to the end of it. And so I just have to wait till next year to finally do something. Yeah, every year I say I'm going to go to the beach more. And I think I did one time this year. Yeah, I as well only did one. Yeah. And I usually try to say I'm going to do five to ten, and that did not happen.

0:41So next year, better goal setting. I know. Yeah. Apologies to the Jersey Shore. But yeah, next year. For this week, and of course, this is when we sort of start to ramp up our fall and holiday coverage. So we will be very busy from here on. But this week, we have a lot of news to cover. There's been a lot of earnings this week. So we are going to kick off with a couple of stories on some brands that reported earnings that were less than stellar. These include Dollar General and Lululemon, two companies that were still doing relatively well, all things considered, but they are also showing signs of slowing down.

1:25And then at the end of the show, we're going to wrap up by talking about Foot Locker's just ongoing strategy of reining in a lot of spending, like closing a lot of stores, pulling out of international markets, just overall streamlining and why and how they're doing it. So yeah, let's get started with Dollar General, which is feeling the heat of the economy like any other retailer, even though I think they did really capitalize on being sort of a bargain shopping destination for a little while while inflation was high. Yeah, it's a very interesting situation, because one would think that dollar stores are inflation resilient, you know, inflation proof, blah, blah, blah.

2:09And the company is growing post-fine growth. It did not hit expectations. The stock has been nosediving. And it's just very interesting to see. We're going to dive into this in a few minutes, but what the reasons are, why growth is not where Dollar General wanted it to be. But I'll give a few numbers just to sort of set the table. So they say its revenue was$10.21 billion, which was less than the expected, the overall analyst expectation of$10.37 billion. Still, it's 4.2 % year-over-year growth. So last year's revenue was$9.8 billion. This year's is $10.21 billion. Nothing to sneeze at. But I think the big thing that investors were unhappy about is that Dollar General lowered its outlook.

2:58So it now anticipates 2024 same-store sales to be between 1 % and 1.6%, which is lower than what it previously said it would be, which would be between 2 % and 2.7%. And when the earnings hit earlier this week, the stock fell by as much as 25%. So people were not happy about this new outlook. Yeah. And maybe we could talk a little bit about what the company is attributing to the slowdown, I guess we can call it, which is that And the CEO, Todd Vassos, said that it appears to us very strongly that this lower end consumer continues to be very financially strapped, especially as it relates to her ability to feed her families and support her families.

3:46So, of course, you know, they do think of the mother of the household to be sort of the big shopper, which is interesting. But, yeah, he did also say that same store sales growth was positive in June. But then it went down in July, which I thought was interesting because we did see a pretty decent bump in July overall in retail sales due to the prime day bump that we had that we talked about a few weeks ago. Yeah. And I dove into this. I read the earnings. There are so many interesting tidbits that they gave. And I think that you're totally right that the July narrative, at least when you look at the retail numbers, is that things were better than people originally anticipated.

4:26But I think it's about different segments and different demographics, and it doesn't necessarily represent who the target dollar general customer is. There were some really interesting data in the earnings. I have a bunch of quotes that I'm going to try and paraphrase and go through. But just to give a sense, one of them was Vaso saying, as I look at our results throughout the quarter, I would tell you that from our perspective, the last week of the calendar month of each calendar year was the weakest by far. And he also added that during those weeks or during generally, the most popular lines were Dollar General's private label line, which is$1 or less.

5:04So pretty much he's saying people are spending all of their paychecks. They don't have a lot for the last week of the month. And they're spending less as a result of that. And when they are spending, they're spending, true to the Dollar General name, the things that are actually a dollar, which as we've covered many times over, things are now more than a dollar at these dollar stores. But that's not where people are spending. I'm going to get into one more quote just because I found this all to be so interesting and a really good lens into what's going on right now because it's so difficult to track where the country is economically.

5:39But he said, as a result, our core customer who contributes approximately 60 % of our overall sales comes predominantly from households earning less than$35 ,000 annually. Inflation has continued to negatively impact those households with more than 60 % claiming that they have had to sacrifice on purchasing basic necessities due to the higher cost of those items. In addition to paying more for expenses such as rent, utilities, and healthcare, more of our customers report that they are now resorting to using credit cards for basic household needs, and approximately 30 % have at least one credit card that has reached its limit.

6:13And in our latest survey, 25 % of our customers surveyed noted they anticipated missing a bill payment in the next six months. Sorry for giving just a long block quote there, but I think that there's a lot of things to go through that, which is pretty much saying Dollar General, its core customer has an annual salary of$35 ,000 or less. And those people are, at least according to its surveys and the results it's seeing from the stores, these people represent more than half of its sales. They're missing payments. They're feeling the heat from higher prices. Even if other companies are seeing sales go up, even if people are saying that inflation is cooling off, those on the lower end of the spectrum are not.

6:52And I think that that is really giving a lens into where we are right now, which is just bifurcated and really unclear. There's no clear narrative about where the economy is at and how people are spending and how they feel about the economy. And this is a really interesting peek into that. Right. And maybe we can now talk about what Dollar General has been doing. They've been on this sort of turnaround plan since 2023. So last year, according to CNBC, the CEO said that they will put more workers in front of its stores and slow down new store openings, also taking underperforming items off the shelf, which has been a fairly popular tactic lately, and just kind of trying to keep merchandise in stock.

7:39more on that later in another segment. But yeah, I think a lot of these issues seem to also be contributing to people trying to purchase things, but not actually being able to, which of course hurts sales. But yeah, in general, though, there is a deceleration that's happening, though. Yeah, there's a deceleration that's happening. And also, I think Dollar General a few years ago was in growth mode. It was riding high from the pandemic, it was opening a bunch of new stores. And now a bunch of things happened, both the economy, but also just some bad press about workers' conditions and just doing too much too quickly.

8:17One of the big things that it's been focusing on is not opening as many stores. And so I got some numbers last year. Initially, the company said it was going to open 1 ,050 new stores, but it revised that down to only 990. Still a lot of new stores, if you ask me. this year, it had previously stated that the goal was to open 800 stores. Now, in its latest earnings, it said it's on track to open 730 new stores, which again, this is a lot of stores. It's a huge retailer, but clearly it is trying to only spend where it needs to spend and focus on the core areas where it believes that it can actually see real growth.

8:56And so it's interesting that, you know, a company that was going to open over a thousand new stores is now like, actually, we're only doing 700 this year. Right. And then, of course, there's been some not so great headlines about Dollar General lately, which is it's trying to rehab that image. I think there's allegations of poor working conditions. And I think it was fined more than$12 million over workplace safety violations. But on the earnings call, the CEO did say that turnover for all types of employees has gone down. So presumably, that means that they have improved some of the conditions.

9:33But yeah, it's been interesting. I think, you know, I've covered Dollar General from more of a merchandising perspective, which is that they have really invested heavily in their private label, as we've mentioned, so which includes working with big CPGs, like they have this body care, personal care line with Unilever that they exclusively developed. So So I think they've been trying to sort of toe the line between catering to that higher-end shopper that was coming in a couple of years ago. And then, of course, now we have people who actually go there for the$1 or less bins. And that, yeah, it'll be interesting to see how that mix fares out.

10:12It's really interesting just seeing the tenor shift in how the company is describing it. Because as you mentioned, the Dollar General does have this private label, has a bunch of them. Most of them are over$1. But at this earnings call, he really, really focused on, I think he said something to the effect of, for our line, that is$1 or less. And yes, we do have products that are$1 or less. Really being like, we are what we say we are. I think it's because it has realized that 60 % of its shoppers are actually looking for things that are$1, as opposed to what happened a few years ago, where more people were coming in, looking for more value, but also probably made more than$35 ,000 a year.

10:52And so now I think Dollar General has shifted its focus into saying, you know, we know they want value. This is the value they're looking for. We're going to reiterate that we have this value. And that seems to be the strategy. Yeah, so I guess we'll see whether this turnaround plan will continue to take shape and see how it'll be doing. But yeah, now let's see why Lululemon is also showing some signs of fallibility. Lululemon also reported its Q2 earnings this week and pretty much said that they are also feeling the economic headwinds. But a lot of their issues seem to also stem from assortment problems, product availability that I sort of hinted at at the beginning.

11:38But one big surprise, I guess, or disappointment was that U.S. sales have flatlined after just the America specifically, after years of major growth. And this has to do with the core customer not really going in because, again, we'll talk about the product assortment and why that is. But yeah, why don't you give us some of the numbers? Because I thought those were interesting with US sales in particular falling 3%, which if you would have told me that a year ago, I would be very surprised. Yeah, no, that is surprising. So revenue as a whole rose 7 % year over year. Lulu's revenue was$2.37 billion, but it was still below expectations of$2.41 billion.

12:18Its net income was$393 million compared to$342 million a year ago. So there's growth there. But again, as you said, U.S. sales fell 3%. And the company also cut its full year guidance. I believe that we're seeing this mostly across the board where companies are now cutting their guidance. In some ways, you wonder if it's because, you know, they want to really lower expectations, hope they have a big holiday season and then can say, actually, we exceeded guidance. But we'll see. But right now that this is what we're seeing as a whole. I was reading some of the analysts notes and they mentioned that there's a growing overlap between Lululemon, which is sort of, you know, the big athleisure athletic brand and some of the emerging brands that we cover here at modern retail like Viore, for example, which is in hyper growth mode right now.

13:09So it seems like that customer is really spreading their wallet share around when it comes to this category, which I'm sure will continue to happen. Yeah. But one of the big issues over the last six months that I've been reading about is just major issues with assortment and merchandise. There was one new product launch that just got terrible reviews and had really bad sizing issues, which I think the company now says is fixed. But then there have just been otherwise out of stocks across the board. I was reading a B of A report this morning. And while the analysts are overall bullish on Lulu, the sentiment is that more newness is needed in women's, that it reached historic lows, and its core is not as exciting to the customer, and that right now it's really needing to update the merchandise.

13:56And so I thought that was sort of an interesting thing that ideally it will be able to fix, but you've never heard that before when people talk about Lululemon. right and i think you know those core products that people buy over and over this is anecdotal but i feel like i've been waiting for um my size in black which i know is that is what everybody's trying to buy always um has been out of stock for what feels like months and months and that that is a an issue that's plagued uh a lot of retailers but lululemon in particular because they have this very loyal customer base but some of that blame was also um indirectly directly being blamed on the leadership shift, which is that long term chief product officer Sancho, who has really led this effort over the years, left in May to pursue another opportunity.

14:43And that sort of sent out a signal that there's just, I guess, not one person sort of envisioning what's going on there. But McDonald, the CEO did confirm that their global creative director will be overseeing the division and reporting directly to him. So I think they're hoping and, you know, assuring people that the merchandising issues will be fixed, hopefully, before the holidays arrive. And what is interesting, and I mentioned this before, but I'd love to just get your opinion, which it seems like this isn't the only thing that is impacting Lululemon, but it seems like this breeze-through product, really.

15:19So the breeze-through product, I don't, they're leggings, There were issues with fit. There were bad reviews. And the company really had to go out and say, like, oops, we messed up. We're going to fix this. There's this quote from CEO Calvin McDonald. He said, while guests were excited by the fabric, the design didn't meet their expectations. Listening to our guests is central to who we are and how we grow our brand. And we took the right step of pausing on sales and look forward to reintroducing the fabric in the future. This decision had a negligible impact on our performance in this quarter.

15:50That might be true, but I also think that that dominated a lot of the headlines and probably skewed a lot of the way investors were thinking about the company when such a beloved athleisure brand has such a misstep because this just seemed very un-Lulu of them. Do you agree? Yeah, I think so. Although as an aside, you know, the sort of, I guess, quality control has also been criticized more on the customer side, you know, having read a lot of reviews. It's just like this tone that's shifted where it's like, well, you know, the products, the quality isn't as good as it was like five to 10 years ago.

16:23That's probably a separate issue. But I think the overall perception is that these, you know, you are spending$100 plus on a pair of leggings. You expect longevity and quality. And these the breeze throughs and specifically seemed unflattering, which is a big no, no for the Lulu customer. Like you want to, you know, you want that compression, you want it to look good and perform. So but he did say, actually, yeah, McDonald's said that they only had ordered a small batch. So I guess they're going to go back to the drawing board and fix that. They didn't invest too heavily in that first production run.

16:57So they're acknowledging that it wasn't the best launch. Yeah. Yeah. I mean, it's interesting to see. And Lulu was kind of unimpeachable. I don't know if unimpeachable is the right word, but it was a brand that was touting doing a lot of growth, was in on the trends. It really was doing things right. And so when you see a quarter like this, where it's not terrible, but you're seeing a perception shift, it's definitely worth noting exactly what happened and why it's happening. So definitely something interesting. Yeah, I guess we will see whether these mistakes are quickly righted and whether the holiday sales will create another bump to swing back at least the U.S.

17:37sales to where they were expected to be. Now let's move on to shakeups at another athletic retailer to wrap up the episode, which is Foot Locker, which has also been going through some growing pains, or maybe I should say contracting pains since it's really scaling back its operations. But yeah, what are your thoughts on this? I mean, just writing out, you know, researching the amount of cuts they've made. I was like, whoa, this is a very exhaustive list. We will try to get through it as well as possible. Yeah. So just to give a brief summary, Foot Locker posted earnings. Part of it, it announced that it's leaving several international markets by mid-next year.

18:18These include South Korea, Denmark, Norway, Sweden. It's transferring ownership of its Greece and Romania operations to the licensing business Forlis Group. In total, these closures will involve 30 stores that will either completely close or transfer ownership. It's not a huge amount of stores, but still a lot of countries. And then also, which I thought was super interesting, is Foot Locker is moving its headquarters. It's not going to be in New York City anymore. It's going to be in the New York City of Florida, maybe St. Petersburg. This is going to happen also in 2025. Comes on the heels of Foot Locker's quote unquote meaningful presence in St.

18:59Petersburg. But most importantly, which is sort of the name of the game with Foot Locker, with every retailer, moving from New York to St. Petersburg will cut costs. There's a lot going on there. All of this has to do with it's just trying to whittle down its losses and cut costs wherever it can. It's going to a place that I'm sure a big office building is much cheaper, real estate in New York. It's expensive. St. Petersburg, I can't say from firsthand knowledge, but I imagine they got a much better price per square foot there. Yeah, I think they are going to keep a little bit of a presence in New York.

19:32But for the most part, the reason actually I was reading is that the former champs headquarters is over there. And so I guess I'm sure a lot of people who work for the company are in that area. So I guess it makes sense that they want to really establish their HQ presence there. But yeah, it seems like a lot of these, the move, you know, cutting costs and all of that has helped. You know, this is part of a bigger strategy that they've had for the last, I would say, like maybe a year or so in announcing some of these cutbacks. Like, for example, pulling out of Europe, closing 400 mall-based stores by 2026, which is a lot.

20:13Like, I guess that gives you, you know, perspective on how many locations there are. And, you know, we'll get into, obviously, Foot Locker operates some other retail chains, brands. And so, yeah, it seems like a really big pullback, I guess, compared to a couple years ago. Yeah. And I think a lot of it is just focused on figuring out the profitability and unit economics for every part of the business. I was reading some of the coverage of the earnings. Mary Dillon spoke with CNBC just talking about how overall the efforts to reframe the business are working. she said the reason that we're doing it is that it is working for us both in terms of enhancing a customer experience and a striper store experience but also the financial returns the performance is as ahead of what we thought so pretty much the company has been cutting down looking at different things to transform its business and she says that this has been working and the profitability has been going up and so it makes sense but also it means that there will be less of a presence and she's being much more choosy about where they open or and being a much more liberal with where it closes stores.

21:20Yeah, a couple of other comebacks I'll mention, which is that last year, they also sunsetted this chain called Sidestep, which is sort of like it's European sneaker banner store. And then they had plans to expand into Japan that were also scrapped. But yeah, on the other hand, though, sales are growing for the first time in 18 months. So, you know, I'm sure, you know, that's kind of coinciding with the cost cutting, but it seems to be, I guess, working gradually, at least. In Q2, the sales increased 2 % to$1.9 billion, and then comp store sales increased by 2.6%. That was led by Global Foot Locker and Kids Foot Locker comparable sales.

22:07So I think not a bad performance, especially after, like I said, 18 months of declining sales. So it's sort of swinging back around. But the execs did acknowledge that there's still a lot of work to be done. So, yeah. Yeah. And one of the things they talked about was repairing its relationship with Nike. You know, Nike is going back to wholesalers. Foot Locker is a major wholesaler of Nike's. And so Mary Dillon talked a lot about this. You know, any other shoe store who's working with Nike will talk about this. But I think that that plays a very big role is when you have a very popular footwear brand and they suddenly cut ties with a lot of their accounts, that will hurt sales.

22:45Now they're coming back in, but they need to figure out the best way to make it work so that it actually continues to be a sales driver. So that's another thing that I'll continue to be looking out for is just the relationship between Foot Locker and Nike. Yeah, so it'll be interesting to see whether more of these aggressive cutbacks will continue to improve margins in the coming couple of quarters. I think we'll really get a better sense of that. But yeah, on that note, that is our show for this week. You can rate and review us wherever you get your podcasts. And you can listen to the Modern Retail Podcast, our interview show with Kale and industry executives.

23:21Kale, do you have a preview for next Thursday's show? Sure. I spoke with the company Croissant, which is it's in the resale space. It's kind of hard to explain, but essentially it is helping people buy new clothes with the understanding that they will be able to resell them at a fair price. It's a fascinating new company. If you get sub stacks, you've probably been getting a lot of marketing from this company. And so we talked about the marketing being a resale app sort of in between a lot of the different companies. It was a fun conversation. Cool. Exciting. Also follow us on social. We are at Modern Retail and come back on Saturdays to hear more rundown by us.

24:03Thank you so much for listening.