By Sruthi Ramakrishnan
(Reuters) - Discount retailer Dollar General Corp <DG.N> reported a surprise drop in quarterly comparable sales and tempered its full-year profit forecast, hit by lower grocery prices and reduced food stamp coverage in several U.S. states.
The company's shares were down 7.3 percent at $71.67 in morning trading on Thursday.
Food prices have fallen in the past few months due to low commodity prices and intense competition, resulting in aggressive price cuts by Wal-Mart Stores Inc <WMT.N> and other food retailers.
Grocery deflation has reduced the price gap between Dollar General and higher-priced rivals and has made the company's prices less competitive, Conlumino analyst Håkon Helgesen said.
Wal-Mart has likely captured some spend of Dollar General's customers, Helgesen said.
Dollar General said it reduced prices on about 450 items in about 17 percent of its 13,205 stores in the third quarter but it did not help drive traffic as much as anticipated.
"It became apparent that our incremental actions would not be able to overcome the decline in traffic in our stores... requiring greater-than-anticipated markdowns," CEO Todd Vasos said.
Discount retailers have also been hit by changes in the Supplemental Nutrition Assistance Program (SNAP), formerly called the food stamp program.
By the end of 2016, 22 states would have changed the criteria for SNAP - which is likely to result in as many as 1 million Americans losing benefits.
States implementing SNAP changes this year include Florida, Georgia, Alabama and Tennessee, which have some of the highest concentration of Dollar General stores.
Comparable sales in such states were reduced by about 1 percentage point due to the cuts, Vasos said.
"The cumulative effect of macroeconomic factors such as the reduction of SNAP participation and benefit levels and increased housing and healthcare expenses appear to have taken a noticeable toll on (consumer) spending."
Dollar General said it now expects earnings to come in at the low end of its 10-15 percent growth forecast range for the year ending Feb. 3.
For the third quarter ended Oct. 28, sales at stores open at least 13 months fell 0.1 percent, compared with the 0.8 percent growth expected by analysts polled by research firm Consensus Metrix.
Net income fell 7 percent to $235.3 million, or 84 cents per share, and included a charge of about 5 cents per share.
Analysts on average were expecting a profit of 93 cents per share, according to Thomson Reuters I/B/E/S.
(Editing by Saumyadeb Chakrabarty and Shounak Dasgupta)