Dollar General Reinvented itself in 2022. Now management waits for the results.

Dollar General completed its expansion into home goods and fresh. Now it's heading to the suburbs.

You may have missed it, but Dollar General, the discount retailer that targets low-income rural America, reinvented itself in 2022.

The company targeted a few avenues:

• Changing its product mix

• Expanding to the suburbs

• Bringing transportation in-house

• Leaning into retail media

Dollar General's changing product mix.

• The company wrapped up a non-consumables initiative (NCI), which stocked home goods at higher prices at all Dollar General Stores.

• DG Fresh is a strategic, multiphase shift to self-distribution of frozen and refrigerated goods, which has led to cost savings and significantly enhanced profitability of the company's perishables offering. The company now delivers perishable products to over 19,000 stores from 12 facilities.

Dollar General is still coming to the suburbs.

• pOpshelf is Dollar General's answer to Homegoods--offering a variety of $5-$10 home furnishings--located mostly in the suburbs.

• In 2022, the company opened 140, intending to have 1,000 locations by the end of 2025.

Transportation in-house

• The company started the process of bringing transportation in-house. It now has 1,600 corporate-owned trucks, with plans to expand to 2,000 by year-end.

• The goal is cheaper and more flexible transportation—vital for the fresh good initiative.

Leaning into Retail Media

• Dollar General experienced significant growth in its DG Media Network in 2023. Management didn't give numbers, but they said there was considerable interest and participation from CPG companies and brands seeking to connect with rural customers, representing about 30% of the country.

Unfortunately for management, the results haven't paid off...yet. The company missed its EPS by about 38 cents.

"I can tell you, we're disappointed in our results," CEO Jeff Owen said. "If you think about these challenging times we're in right now, this company is in a much different place. And as our customer has gravitated towards more consumables, the investments we've made in our strategic initiatives have allowed us to serve her even better and more profitably."

Inflation fueled Dollar General's fourth-quarter growth.

• Q4 comp sales rose due to an increase in average basket size, despite a slight decrease in customer traffic in late December.

• The company observed a shift in customer spending towards more affordable options, including its private brands, which accounted for over 20% of its total sales.

• Management said the company increased its share of wallets and trips across all income segments in Q4. Gross margin declined slightly to 31%--primarily driven by consumers buying less margin products.

Political Choices Impact Dollar General.

• At the start of the pandemic, Congress set up an emergency SNAP allotment, giving 41 million people an addition $95 a month in food stamps. Those benefits are rolling off, and now it's up to state governments to extend or end the program. Generally speaking, democratic states are pushing to extend, and Republicans are trying to end it.

• Dollar General has not seen any impact on sales—yet. "It's possible this could further pressure the low-income customers somewhat in the near term," CFO John Garrat said. "We didn't see an impact last year. Some rolled off, but the customer is in a different place now."

• The company saw a slight sales increase due to the recent social security cost of living adjustments.

They said it:

CFO John Garratt on what the company expects for 2023:

But then as you think of the tailwinds, the biggest one I would point to and the biggest overall driver I would point to here is the supply chain. We expect a pretty material benefit from lapping the increased supply chain expenses in the second half of last year as well as the sizable benefits from greater distribution center capacity and productivity, lower carrier rates as well as the benefit of expanding our private tractor fleet, which we're growing from 1,600 tractors at the end of last year to over 2,000 by the end of next year. And again, as we make those conversions, it's about a 20% savings in addition to other benefits that we expect as we optimize DG Fresh, NCI, and then expect a pretty sizable benefit from DG Media Network to name a few.

And then obviously, we intend to leverage our scale as we have as a limited SKU operator, and that's another lever amongst the other levers we've mentioned in the past. So again, as you look at the guide for the year, we gave the top line, the bottom line, we didn't give gross margin, but I think it implies a pretty healthy operating profit growth than rates overall despite pretty sizable investment in the business.