GOODLETTSVILLE, Tenn. — While the economy continues to provide a strong tailwind for discounters, Dollar General has generated some momentum of its own.
The retailer here last week reported robust sales and soaring profits behind an influx of new customers and additional visits from returning shoppers during the first quarter, which ended May 1. Analysts attributed the success not only to the economy but to effective execution of strategies to improve store conditions, product selection and finances enacted by management over the last year.
Richard Dreiling, the chief executive officer and a former Safeway executive, took over at Dollar General last January, shortly after its acquisition by an affiliate of Kohlberg Kravis Roberts. He launched a series of initiatives to invest in merchandise re-sets and reduce internal costs, many of which are already paying dividends.
“He's a hands-on operator who can focus on every aspect of the business,” said Mary Ross Gilbert, managing partner of Imperial Capital, Los Angeles, told SN. “He's not the kind of guy who will come in and cuts costs everywhere, and improve the business that way. He is actually trying to improve the entire customer experience and the entire assortment in the store, to make it a highly relevant business.”
Dreiling spent 33 years at Safeway in various executive positions, including executive vice president of marketing, manufacturing and distribution and, before that, as president of the Vons division in Southern California. He also worked on turnarounds at Longs Drug Stores and Duane Reade before joining Dollar General.
For the 13-week quarter, Dollar General generated net income of $83 million on sales of $2.8 billion. Sales improved by 15.7% overall and by 13.3% on a comparable basis. Profits were up by 1,307% from $5.8 million last year, due mainly to a gross margin improvement of 193 basis points, to 30.8% of sales.
“Certainly Dollar General is benefiting from the current economic environment where consumers are looking for value,” said Gilbert. “But you have to give a lot of credit to management here. They have done a fabulous job of executing.”
Gilbert said she was especially impressed that Dollar General was able to improve profit margins in the midst of a highly competitive, promotional retail climate.
“This couldn't be a more promotional environment. It's competitively promotional,” she said. “But they were still able to reduce product cost and deliver value from a competitive standpoint while also expanding their margins.”
In a conference call discussing results last week, Dreiling said he expected the company could continue driving strong numbers as the chain improves in areas such as general merchandise, and reaps benefits of an aggressive store rollout and a newly launched decor and logo package the company began rolling out at new stores and renovated locations this month.
He noted that private-label items have grown to about 950 from 600 a year ago and that he expected the line would take off as part of the new decor rollout — expected to reach as many as 300 stores this year. At the same time, Dreiling said, “When you are driving the kind of numbers we are driving right now, and getting the level of execution at retail, the vendor community is really willing to play with you.
“We're very pleased with the vendor relationships we have right now,” he added. “We're working together and we view it as a partnership of advancing sales on both sides of the table.”
Dollar General is outperforming peers in the discount space in part because it started from a lower rung, noted Grant Jordan, an analyst with Wachovia Securities, Charlotte, N.C., told SN. But that improvement has become “contagious,” he said.
“The changes they've made have energized the employee base, and that has improved operations and helped reduce shrink. They feel better about the company and that's helping to make the stores look better,” Jordan told SN. “At the same time, it's energizing the customer base. And you're also seeing the vendor community excited to get into Dollar General and hook up with these guys. It's kind of contagious.”