GOODLETTSVILLE, Tenn. — Quarterly profits at Dollar General Corp. came in below expectations as the retailer took a hit on margins and marked down some items to serve shoppers challenged by rising gas and commodity prices.
The retailer last week said sales for the fiscal first quarter, which ended April 29, improved 10.9% to $3.45 billion, while net income climbed 15% to $157 million or 48 cents per share. Analysts expected 50 cents per share. Same-store sales improved by 5.4%.
Gross margin of 31.5% of sales was down 63 basis points from the same period last year. Company officials said that they did not expect margins would expand for the fiscal year, although they maintained their yearly profit forecast, counting on private-brand growth, improvements in sourcing and shrink, and efficiency to mitigate some margin pressure.
Richard Dreiling, chief executive officer, said inflation in fuel and commodities increased faster and more dramatically than the company was anticipating during the quarter, but that it held the line on pricing in deference to price-sensitive customers who also felt the gasoline jolt. Suppliers have increased coffee prices four times since December, he said, but the company has yet to pass them along.
“We have 228 items that are priced at $1 that we think are incredibly important to our customers that we elected not to take the price increases on,” Dreiling said. “This sounds almost silly but a dollar item going to a $1.15 in our channel is a major change for our customers.”
Holding prices resulted in strong improvements in unit sales and helped open a wider gap between prices at Dollar General and drug store competitors, Dreiling added. The company anticipates “easing in” price increases over the remainder of the year.
Dollar General is drawing more trade-down customers, but those shoppers are mainly buying consumable items, which is shifting Dollar General to a lower-margin mix. At the same time, Dollar General traditional shoppers have eschewed non-essential purchases as they struggle with high gas prices and unemployment. That prompted the company to mark down items like apparel at greater discounts than anticipated, Dreiling explained.
“We don't want to wake up and be a 7,100-square foot grocery store, that's not the goal here,” Dreiling said. “But right now the way the customers are voting with their wallet, the consumable side of the business is the most important.”
Dollar General reiterated plans to open 625 new stores this year. The company has completed remodels at six of its existing Dollar General Market locations with expanded grocery offerings, which are producing “strong results,” Dreiling said. He said the company would open some DG Market stores in new geographies during the second half of the year.
