Despite short-term profitability issues, Dollar General's transformation into grocery and home goods is moving forward.
What to know
In the last two decades, Dollar General spread like wildfire throughout America. It's used a basic strategy to transform itself from a mid-south operator into the 17th largest retailer in America.
- Lower real estate costs by never buying and always leasing small-footprint stores.
- Simplify inventory and purchasing power by only carrying 10-12,000 items—most of which are shelf stable.
- Lure shoppers in with low absolute cost while maintaining big margins through high unit costs.
- Lower operating costs by underpaying and understaffing stores.
- Avoid big-name competition by locating stores in rural areas where even Walmart won't go.
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This strategy is incredibly profitable, but it also has real social costs.
In 2013 revenues at the Tennessee-based retailer neared $16 billion. In 2022, the company crossed $35 billion in annual income, doubling its revenue in under a decade. In that same period, Dollar General added around 6,500 stores to its footprint—with many more to come.
Dollar General is adding more stores and entering traditional grocery.
- In 2023, the company plans to open 1,050 new stores.
- Most are deviating from the traditional strategy. In 2021, Dollar General started carrying refrigerated and frozen goods across its 19,000 stores.
- The scale of the investment is impressive. By the fiscal close, the company plans to install over 65,000 cooler doors across its retail network.
- Refrigerated and frozen food is just the start. 3,000 stores now carry fresh produce. Management plans to expand fresh offerings to 10,000 stores by the end of 2023.
- CEO Jeff Owen attributes a 1% increase in gross margin to the initiative.
Dollar General expanded into home goods with pOpshelf.
- Launched in 2020, pOpshelf is a clone of 5-Below. The company leverages its existing buying and distribution network to sell home goods for around $5.
- The big difference is where the stores are located. pOpshelf targets real estate in affluent suburbs.
- Dollar General plans to open 150 stand-alone pOpshelf locations by the end of the year.
Profitability is down for the quarter, but sales are up.
- The company cut its yearly profit outlook by 40%. The big drivers are supply chain snags and product mix.
- Dollar General recorded $40 million in third party storage costs as it needed to catch up with the spike in inventory.
- Consumers are buying more consumables—which means lower margins. "We want to go where the customer goes," CFO John Garratt said. "(We) like the sales we're seeing, but it does pressure your margin a little bit with the mix of the sales."
- Same-store sales at Dollar General are up 6.8% compared to last year. That means existing stores brought in almost seven percent more revenue than in 2021.
- However, all growth isn't created equally. CEO Jeff Owen attributed most of the same-store sales growth to inflation and cautioned investors about volume. "As we would expect during a more challenging economic environment," he said, "average units per basket were down." Shout out to Errol Schweizer, who pointed out this larger trend.
They said it
Here's how CEO Karl Owen described the quarter:
The quarter was highlighted by strong performance on the top line, led by comp sales growth of 6.8% and included increases in traffic and in market share of both consumable and nonconsumable product sales.
During the quarter, we experienced significantly higher-than-anticipated cost pressures, including challenges within our internal supply chain, sales mix pressures and higher inventory damages and shrink, all of which impacted gross margin. We will elaborate more on these cost pressures in a bit.
But despite these challenges, we delivered a double-digit increase in diluted earnings per share, along with strong same-store sales growth. As the economic environment continued to evolve during the quarter, we remain focused on serving the needs of our core customer.
