Investors came into the month of June with some optimism about what the summer could bring. With a debt ceiling solution seemingly on the way, market participants remain hopeful that the U.S. economy can avoid recession and keep chugging along at a modest but reasonable pace. Major market benchmarks climbed in response, with the Nasdaq Composite leading the way in midafternoon trading with a 1.3% gain.
However, not everyone remains convinced that consumers are in good financial shape. Indeed, shares of consumer-facing companies at both ends of the income spectrum faced challenges on Thursday. Dollar General (DG -18.39%) caters to those seeking discounts, while Lucid Group (LCID -16.87%) has aimed squarely at the luxury electric vehicle market. Both stocks fell sharply as investors try to determine whether recent events will help or hurt their respective businesses.
Dollar stores see economic headwinds
Shares of Dollar General sank 18% in midafternoon trading Thursday. The dollar store retailer’s first-quarter financial report for the period ended May 5 fell well short of what investors had expected to see in a challenging macroeconomic environment that would usually favor the lower end of the retail spectrum.
Dollar General’s numbers weren’t terrible, but they didn’t live up to the expectations of the company’s shareholders. Net revenue of $9.3 billion was up 7% year over year, but same-store sales were up just 1.6% from year-ago levels.
Even though average transaction amounts were up from the same period in 2022, traffic levels declined. An increase in overhead expenses offset gross margin gains from higher inventory markups, which led to a 1% drop in operating profit. Net income dropped 7% to $514 million, and even with a decline in share counts, earnings were down 3% to $2.34 per share.
Investors also weren’t pleased to see Dollar General pulling back on its guidance for the remainder of the year. Citing more difficult macroeconomic conditions than expected, Dollar General cut its sales growth expectations to a range of 3.5% to 5%, down from 5.5% to 6%. Full-year earnings could fall as much as 8% and are unlikely to do better than match 2022 levels. Moreover, the dollar store retailer is cutting back on its capital expenditures and reducing store openings, and it expects not to resume share repurchases for the remainder of the year.
For a while, Dollar General and its peers had started to persuade shoppers to buy more expensive items with higher margins. Now, however, consumers are clamping down on their spending. That could keep Dollar General from growing as quickly as the company had hoped until the economy improves.
Lucid raises capital
Meanwhile, Lucid Group shares dropped almost 20% in the same period. The luxury EV maker resorted to a secondary stock offering in order to raise cash, even though the stock has struggled mightily of late.
Lucid announced that it would sell 173.5 million shares of stock on the open market as part of a broader effort to raise about $3 billion in total. At the same time as the secondary offering is happening, Lucid also persuaded its majority shareholder, Ayar Third Investment, to buy 265.7 million shares for about $1.8 billion.
Doing the math, Ayar’s investment implied a price of roughly $6.77 per share, which was about $1 per share lower than where Lucid stock closed Wednesday. Accordingly, Lucid’s share price dropped Thursday morning to reflect that new valuation, and the stock has continued to fall amid broader fears for the EV company.
Lucid has said repeatedly it would need more capital to pursue its long-term growth strategy. However, the costs of capital have been on the rise, and shareholders should prepare for further dilution ahead until Lucid’s business prospects start to look more attractive.
Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.