Make More Room for Dollar General

Make some room for Dollar General.

The fast-growing discount chain is moving to increase the size of its standard store format it builds this year and will mix in a still-larger iteration that can incorporate expanded selections of food, including fresh produce and meat.

These changes will bump the size of stores the discounter builds from 7,300 square feet to 8,500 square feet and will become the base prototype for future Dollar General stores, officials said this week. A 9,500-square-foot variation, including 50 cooler doors and space for meat and produce along with a larger checkout, will also arrive in about 100 locations.

This larger standard, which succeeds the “traditional” (7,300 square feet and 22 cooler doors) and “traditional plus” (7,300 square feet, but expanded to accommodate 36 cooler doors) formats, joins the fresh-focused DG Plus format—all aimed at driving a larger share of customer spending through optimized assortments, CEO Todd Vasos said while reviewing the Goodlettsville, Tenn.-based discounter’s fourth-quarter and fiscal-year sales results this week.

As previously reported, Dollar General intends to open about 1,050 new stores this year. The new larger stores—which were tested in select locations last year—will begin arriving later this year.

According to Jeff Owen, Dollar General’s chief operating officer, the revised fleet is designed to take advantage of strategic initiatives underway at the company including its move to self-distribute frozen and refrigerated foods known as DG Fresh, and the NCI initiative to build assortments of non-consumable items. The latter movement led to development of a new home decor, HBC and cleaning store known as Popshelf that will also be expanding to 30 locations this year and with store-in-store departments in some locations.

The company has completed the first phase of DG Fresh, and by the end of last year, was self-distributing to more than 16,000 stores from 10 facilities. The initiative is meeting its goals to reduce costs and support higher margins in food—long a category that drew traffic to the chain but also introduced a drain on its margin mix.

“DG Fresh continues to be the largest contributor to the gross margin benefit we are realizing from higher initial markups on inventory purchases, and we expect this benefit to grow as we continue to scale this transformational initiative,” Owen said, according to a Sentieo transcript. “Another important goal of DG Fresh is to increase sales in these categories. We are pleased with the success we are seeing on this front, driven by higher overall in-stock levels and the introduction of new products in select stores being serviced by DG Fresh. Given our success to date, we are further accelerating the rollout of additional offerings with the recent introduction of even more products, including both national and private brands as we look to further optimize our assortment while increasing our relevance with customers.”

And while fresh produce is not included in initial rollout plans, “we believe DG Fresh provides a potential path forward to expanding our produce offering to more than 10,000 stores over time as we look to further capitalize on our extensive self-distribution capabilities,” Owen added.

Strong Quarter, Cautious Outlook

For the 13-week fourth quarter, which ended Jan. 29, Dollar General said sales improved by 17.6% to $8.4 billion, with comps improving by 12.7%. Operating profit jumped by 21% to $872.2 million.

Gross profit as a percentage of net sales was 32.5%, an increase of 77 basis points, behind higher initial markups and fewer markdowns, an increase in higher-margin non-consumable items and a reduction in shrink as a percent of sales.

Earnings per share of $2.62 fell short of consensus estimates, although revenues were stronger than many analysts had anticipated.

Dollar General is forecasting that sales at existing stores will decline between 4% and 6% compared to 2020, though said comps on a two-year “stack” to normalize for the COVID boost last year would increase between 10% and 12%.

The company was reticent to forecast any effects of stimulus checks into its outlook, noting the round will arrive amid an “opening” economy with more places for consumers to spend than last year’s checks, which amid lockdowns.

“It’s relatively unknown what impact it will have, to what degree it might help, so that's not taken into consideration in the guidance,” John Garrett, Dollar General’s CFO, said in the call. “It could be an upside. I hope it is. But there’s just a lot of uncertainty. … Compared to the previous stimulus rounds, which helped us, the economy is opening up now more. And so we are competing with other segments of the economy outside of retail for that share of wallet. So how much we get is uncertain."

Further complicating the outlook is a rocky start to this fiscal year, impacted by unusual winter weather in many parts of the country that shut down nearly 30% of Dollar General’s stores for a day or two in February, Vasos said. He tried to focus analysts—and the company—on the opportunity to retain new shoppers gathered up last year.

“I think the bigger picture is we’re retaining a lot of those customers … that we got during the pandemic. And we’re still working very hard to keep Dollar General top of mind to those customers, so that when she continues to consider where to shop for her everyday needs and many of these new non-consumable type items that we've got in our stores, she still comes to us. So we believe we’re seeing that repeat customer. And there's no reason why we [don’t] deserve, and have the right, to keep that customer based on our service of her in the past as well as what we believe we can do in the future for her.”