By Sruthi Ramakrishnan
(Reuters) - Discount retailer Dollar General Corp <DG.N> said it was cutting prices on its most popular items such as bread, eggs and milk, intensifying a price war with retail giant Wal-Mart Stores Inc <WMT.N> to win back market share.
Dollar General's shares fell as much as 14 percent on Thursday after the company reported quarterly sales below estimates, blaming aggressive competition, lower food prices and a reduction of food stamp coverage in several U.S. states.
Larger rival Dollar Tree Inc <DLTR.O> also reported lower-than-expected sales, sending its shares down 8.3 percent.
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Dollar General cut prices by 10 percent on average on about 450 of its best-selling items across 2,200 stores during the quarter, Chief Executive Todd Vasos said on a conference call.
He said the company expects to extend the price reductions to more product categories and markets.
Wal-Mart's strategy of cutting prices has helped the world's largest retailer to boost sales in the latest two quarters.
"Wal-Mart's been doing better lately, lowering prices, and that's been a concern that (it) could impact dollar stores," Edward Jones analyst Brian Yarbrough said.
"Historically, it hasn't as much but maybe we are seeing something different here."
Dollar store operators have expanded aggressively in recent years, taking market share from Wal-Mart and other retailers, thanks to their smaller store sizes, improving product assortment and price points starting $1.
Dollar Tree's Chief Financial officer Kevin Wampler downplayed any impact from competition. "I can't tell you (competition) is an issue anymore for us than it usually is."
Retailers are also grappling with a drop in grocery prices that has pressured margins in the second quarter .
Dollar General said prices for milk were down about 8 percent and for eggs over 50 percent.
'SNAP' CUTS HURT
Some states changed in April the criteria for the Supplemental Nutrition Assistance Program (SNAP), formerly known as food stamp program, as they brought back a three-month limit on benefits for unemployed adults.
More than 500,000 people are estimated to lose SNAP benefits this year, according to research group Center on Budget and Policy Priorities.
Dollar General said the changes in SNAP along with grocery deflation reduced same-store sales by 60-70 basis points in the second quarter ended July 29 and were expected to hurt results in the second half of the year as well.
Though Dollar Tree said the impact from changes to food stamps was small, the company's acquisition of larger rival Family Dollar last year has increased its exposure to the program.
Dollar Tree, which traditionally caters to middle-income consumers, attributed the "challenging retail environment" to consumers being pressured by higher rent and healthcare costs.
Dollar Tree also cut its full-year sales forecast to $20.69 billion-$20.87 billion.
The company's net sales rose 66 percent to $5 billion in the second quarter ended July 30, helped by the Family Dollar deal.
Dollar General's net sales rose 5.8 percent to $5.39 billion.
(Reporting by Sruthi Ramakrishnan in Bengaluru, additional reporting by Rishika Sadam; Editing by Don Sebastian)