GOODLETTSVILLE, Tenn. — Dollar General’s rollout of tobacco products, which began in March and was completed by the end of the second quarter, is delivering better results than the company expected, the chief executive officer said this week.

“We are seeing a significant increase in our traffic, and tobacco has been a key driver,” said Rick Dreiling, chairman and CEO, Dollar General, in a confernce call discussing second-quarter results. “Our sales and our traffic are continuing to build each week along with our customers' awareness.”


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When asked by an analyst, Dreiling said tobacco is driving comparable-store sales by more than a full percentage point, although he declined to be more specific. He said about one-third of tobacco purchases are tobacco-only, and the rest are tobacco combined with other products. That’s a higher percentage of accompanying purchases than the company originally projected, he said. The average basket containing cigarettes is almost $13.75, vs. an average without cigarettes of about $10.70, he noted.

The rollout of tobacco products was a contributing factor to margin pressure the chain experienced in the quarter, however.

In response to an analyst's question, Dreiling also said the discounter was considering the possibility of adding a very minimal amount of produce to traditional stores. “That is something we're actually talking about,” he said. “Whether or not that will ever happen or not is still too soon to tell, but oranges and apples and potatoes — things like that — grab-and-go stuff that a consumer forgets on the way home could play out down the road.”

He added that if the company were to add such items it would create only a “very small, manageable display” as opposed to an aisle or even an endcap. Complicating such a rollout is the fact that Dollar General’s supply chain is not geared to handle fresh items, he explained. “On that kind of an item, we have to introduce a middleman, because we don't warehouse our own produce and meat, and you run the risk of having an item that's a little bit higher [priced] … and it depletes your price image.”

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Overall, net income for the 13-week quarter, which ended Aug. 2, increased 15%, to $245 million, compared with year-ago results, Dollar General reported. Sales were up 11.3%, to $4.39 billion, with same-store sales up 5.1%. The company reported gains in both number of transactions and average transaction value. Gross profit increased by 9% but decreased as a percent of sales by 65 basis points to 31.3% in the most recent quarter.

The company said consumables sales continued to increase at a higher rate than non-consumables, driven by tobacco as well as “strong sales of perishables and candy and snacks.”

Through the first 26 weeks of the current fiscal year, sales were up 9.9% to $8.63 billion, and same-store sales grew 3.8%. Gross profit increased by 7% and, as a percentage of sales, decreased by 77 basis points to 31%.

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Charles Grom, an analyst at Sterne Agee, last week raised his rating on Dollar General’s stock from “hold” to “buy,” citing the company’s success at attacking shrink reduction and management’s “intelligent” approach to new-store growth.

“While we do remain concerned about over-saturation in the dollar store space, we do not think DG will make the same mistake it did [about] 10 years — i.e., grow for the sake of growing,” Grom said in a research note.

Dollar General did ramp up its store expansion plans slightly, saying it now plans to open 650 new stores for the full year — an increase of 15 stores over previous guidance. Capital expenditures are expected to be in the range of $575 million to $625 million.

 The company said it expects sales to increase 10% to 11% over 2012 results for the full year, with same-store sales up 4% to 5%.

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