For investors, the term “this time is different” should ring alarm bells. The investing world has a habit of repeating cycles — the issue is that the cycles are usually similar, not necessarily exact copies of one another. So when trends seem to have changed, investors should step back and think about what’s going on a little more deeply. It is highly likely that this time won’t be different after all.
On that note, sales trends at Dollar General (DG -0.43%), Constellation Brands (STZ 0.52%)and Conagra Brands (CAG -0.70%) have changed in a similar manner lately. Let’s talk about how they’ve changed and what it could all really mean for these companies — and investors.
1. Dollar General is in a funk
Dollar General’s stock price has been cut roughly in half over the past year. There’s a mix of problems facing the company, which resulted in the board of directors ousting the CEO and replacing him with his predecessor. That’s an admission that the previous transition plan didn’t work out, and the company is basically trying a do-over.
DG data by YCharts.
That said, one of the key problems Dollar General has been facing is that customers are focusing more on lower-margin consumables (think basics like soap) and less on more-profitable products like clothing and seasonal fare. That’s pushed margins lower and pressured the company’s financial results even though the top line grew 3.9% in the second quarter.
It’s an indication that the company’s consumers, who tend to be lower down on the income spectrum, are trying to cut back. Although the economy overall has avoided a recession so far, this retailer’s customer base seems to be warning that money is tight right now.
2. Constellation is seeing more trips, but less buying
Following on that theme, Constellation Brands, which sells alcohol — including beer, wine, and spirits — has seen a subtle shift in its customers as well. During its fiscal second-quarter earnings conference call, management said:
We’re seeing … more trips, but somewhat less purchasing per trip than we used to see, which simply means people are being a little more careful about what they do given the inflationary environment that exists. … the important part for us is the fact that even though there are more trips, they are making more trips to purchase more of our brands, even if they might spend a little less on any particular trip.
This is notable on two fronts. First, Constellation’s brands are exhibiting strong customer loyalty since buyers are making more trips for the same product as opposed to trading down to cheaper options. But, second, there’s an underlying caution when it comes to spending money.
That’s roughly similar to what Dollar General is experiencing, though not exactly the same since Constellation’s customers are basically spending about the same amount overall.
3. Conagra thinks “revenge spending” is the key issue
That’s where the sales trends at food maker Conagra provide some additional insight. The company has noted that customers appear to be pulling back on food purchases by changing their habits. In the company’s fiscal first-quarter 2024 earnings call, CEO Sean Connolly dug into a little more:
Let me provide a bit more color on the kinds of behavioral shifts we’ve observed. As you’ve seen for some time now, with the notable exception of summer travel, discretionary purchases have been down almost across the board. Consumers have also been actively reducing remnant household inventory from the pandemic. Within food, convenience-oriented items, typically a top consumer priority, have lagged as shoppers have turned to more hands-on food prep to get additional bang for their buck.
And as they’ve done this, not surprisingly, they have shifted from meals per one to meals per many, even if not everyone is home at the same time to eat together. And the last shift I will mention is a reduction in wasted food and an increase in the use of leftovers. Collectively, these short-term behavioral shifts act as a sort of cheat code to help these consumers spend within their means.
Essentially, it looks like consumers are trying to spend on certain things like travel, but in order to do that they are cutting back in other areas, like food (Conagra), alcohol (Constellation), and seasonal goods and clothing (Dollar General) .
This has been dubbed “revenge spending,” following the difficult period around the pandemic when people were basically stuck at home. When consumers get that “revenge” out of their system, Conagra said it expects consumption to go back toward more normal patterns because “consumers are creatures of habit.”
Management believes so strongly in this that it plans to increase advertising in the second half of its fiscal year, when it expects buying patterns to normalize.
Things are different, but not that different
There are a lot of moving parts in the economy today, and there is still a lingering impact from the pandemic playing out. These are just three examples of companies that are seeing shifts in their customer bases.
That said, the overall picture is that consumers are pulling back in subtle ways. The question is whether or not the pattern change is indicative of a bigger risk of economic weakness, or if this is a transitory issue as customers look to prioritize certain spending desires over others.
While there’s no clear answer yet, Conagra is betting that things are going to get better — which could be an issue if management is wrong. If it’s right, which seems reasonable given human nature, Constellation Brands could see customers shop less and buy more, reverting to a more normal pattern.
Of these three companies, Dollar General could be the biggest winner since it might be closer to a turnaround than Wall Street seems to think, given the weak stock price.