Markdowns, margins squeeze Dollar General profits
- Dollar General reported Thursday that fourth-quarter net sales rose 8.5% to $6.6 billion, up from $6.1 billion in the year-ago quarter, with "positive sales contributions from new stores and growth in same-store sales, modestly offset by the impact of store closures."
- Same-store sales rose 4% year over year, driven by increases in average transaction amount and customer traffic, thanks in part to the early release of federal food assistance dollars, according to a company press release. The comp growth included growth in consumables, seasonal and home, partially offset by declines in apparel.
- Dollar General CEO Todd Vasos said that Dollar General is expanding "DG Fresh," an initiative that enables self-distribution of fresh and frozen products. The initiative is currently operating in about 300 stores but the retailer plans on expanding it to 5,000 stores by end of fiscal 2019, Vasos said during an earnings call Thursday morning. The chain hopes to eventually expand DG Fresh to all of its stores, though Vasos declined to specify a timeline.
Investors punished the chain Thursday morning as earnings and guidance missed estimates, Investor's Business Daily reported. But in a statement, Vasos called 2018 "a great year" and said the discounter began 2019 "with a strong foundation for success."
The retailer has been laser-focused on expanding its fresh food offerings throughout 2018, and expansion of DG Fresh takes it up a notch. The program allows Dollar General to reduce costs and gives them more control over what fresh foods are sold in stores and will allow it to sell a wider selection of its private label products, which will protect margins, Vasos noted.
Even without the advantageous release of federal SNAP benefits, Dollar General in the quarter took a higher share of its core shoppers' disposable income, according to research from GlobalData Retail. That was due to its DG Fresh initiative, which GlobalData Retail Managing Director Neil Saunders said lifted average transaction values, as well as its ability to draw in shoppers for the holidays.
In grocery, Dollar General has been focused on expanding its fresh food offerings throughout 2018, and Thursday's DG Fresh announcement steps up that focus. Produce is certainly at odds with Dollar General’s legacy product mix, which includes assorted nonfood items along with consumables like snacks and beauty care products. But the company likes produce and grocery products because they drive regular traffic, and because it sees an opportunity to compete with other food retailers on price and quality.
Dollar General has also been boosting its assortment of frozen foods and private label grocery lines, including its Good & Smart snacking brand.
The dollar store may have dodged a bullet when in 2014 it lost out to Dollar Tree in a skirmish to acquire rival Family Dollar. Dollar Tree is now struggling with what to do with its Family Dollar stores and could end up shutting down nearly 400 of them while changing others over to its own banner — signs that the acquisition hasn't been easily integrated into its operations.
But Dollar General is also helping itself, not just against its dollar store rivals but also more traditional grocery stores, according to Saunders. "Overall, we remain impressed by Dollar General's ability to create a compelling and enhanced shopping experience. Admittedly, stores remain fairly basic, but they are well merchandised, have good stock levels, and categories like beauty and healthy food are being enhanced," Saunders said. "Our data shows that against some mainstream supermarkets, Dollar General is now rated higher for the quality of the general shopping experience, which is both a credit to its own initiatives and an indictment of the lack of investment from those other retailers."
Rising costs, especially wages and freight, which have especially hit low-margin businesses like Dollar General, will continue to challenge the company. But its Fast Track initiative, which aims to streamline labor operations, will likely boost store productivity by giving associates more time to focus on in-store experience, according to Vasos. All of these initiatives will take a toll on the company's SG&A, but will prove to be meaningful over time, he added.
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