GOODLETTSVILLE, Tenn. — Although Dollar General Corp.’s net sales grew nearly 4% during the second quarter of fiscal 2023, soft sales in higher-margin nonconsumable categories, coupled with escalating merchandise shrink, hammered both operating profit and the bottom line. Management consequently lowered its full-year outlook for sales growth and earnings, but maintained its projected capital expenditure and store opening plans.

“While we are not satisfied with our overall financial results, we made significant progress in the second quarter improving execution in our supply chain and stores, as well as reducing our inventory growth rate and further strengthening our price position,” said CEO Jeff Owen in a statement. “These actions were an important driver of improving customer traffic trends and growing total market share in the second quarter. In addition, we executed nearly 850 real estate projects during the quarter, further extending our reach and expanding our ability to serve both new and existing customers.”

Net sales for the three months ended August 4 gained 3.9% to $9.8 billion, missing the Zacks Consensus Estimate of $9.93 billion. Same-store sales inched downward 0.1%, reflecting lower customer traffic that was partially offset by a higher average transaction. From a category perspective, consumables, which accounted for 80.8% of the total top line, registered a 6% increase during the quarter, offsetting declines in seasonal (-1%), home products (-7.7%) and apparel (-7.1%).

The weakness in nonconsumables, which typically deliver higher gross margins than consumables, also contributed to erosion of gross profit and gross margin, which tumbled 126 basis points to 31.08% of sales. Other factors negatively impacting gross margin included lower inventory markups, increased markdowns, higher shrink and inventory damages, all partially countered by a lower LIFO provision and decreased transportation costs.

With selling, general and administrative expenses swelling 136 basis points to 24.01% of sales, operating profit dove 24.2% to $692.3 million. The bottom line consequently slid 30.9% to $468.8 million, or $2.13 per diluted share, well short of the $2.49 per share expected by analysts.

With several of the headwinds that have impacted results in the first half expected to continue, management has revised its sales and earnings outlook for the fiscal year. Net sales are now expected to improve between 1.3% and 3.3%, down from the previous forecast of 3.5% to 5%. Same-store sales are anticipated to range from a 1% decrease to a 1% increase, compared with a prior projection of 1% to 2% growth.

Diluted earnings per share are projected to range between $7.10 and $8.30, representing a decline of 34% to 22%. Previous guidance called for an 8% year-over-year decrease.

Capital expenditures are still expected to range between $1.6 billion and $1.7 billion, while expansion plans continue to call for 990 store openings, 2,000 remodels and 120 store relocations, for a total of 3,110 real estate projects.

In a conference call with analysts, Owen detailed the actions management is implementing to return to the impressive growth achieved by Dollar General over the past several years. First, he said, promotional markdowns, especially in nonconsumable categories, will be expanded to reduce inventory levels. “While we expect this to result in an operating profit headwind of approximately $95 million in the back half of the year, we believe it will drive traffic and also more quickly reduce excess inventory,” he explained.

Owen added that Dollar General will also increase its investment in incremental labor to about $150 million from its previously planned level of $100 million. In addition, up to $25 million will be invested in such areas as an improved inventory demand forecasting tool.

“We are managing this business for the long term,” Owen said.