Four Things You Should Take Away From Dollar General's Earnings

After reaching a record high on Wednesday, Dollar General shares sank 7.5% on Thursday after the largest U.S. dollar-store chain gave a disappointing profit outlook, thanks in part to its plans to increase spending on areas including self-checkout and to take distribution of fresh grocery items in-house. The company’s profit in the fiscal fourth quarter that ended Feb. 1 also fell short after it expanded profit-eroding discounts to attract shoppers.

Still, beyond the short-term stock swings, the company’s results and initiatives say a lot about low-income shoppers and the state of the discount retail market.

Here are some key takeaways:

Price remains the key differentiator for low-income shoppers. Dollar General’s Q4 same-store sales rose 4%, helped in part by the early release of SNAP food stamps benefits as a result of the government shutdown. For the year, comparable sales rose 3.2%, the company’s 29th straight year with an increase.

Dollar General said it continued to gain market share in the consumables category as customer visits and average spending both increased.

However, the demand didn’t come without cost: The retailer’s gross margin narrowed to 31.1%, from 32.1%, as it increased discounts.

Indeed, a Gordon Haskett pricing study released this week showed that dollar stores have narrowed their pricing gap against Walmart, especially in the key food and beverages categories. For instance, the report showed Walmart’s “pricing advantage” over Dollar General narrowed to 0.3 percentage points in February, down from 1.7 percentage points in December.

The holiday fourth quarter “has the highest traffic counts across retail,” Dollar General CEO Todd Vasos said on a conference call. “We pulled some promotional levers in the fourth quarter that we believe will sustain that traffic growth. … We saw a real opportunity to take share.”

And keeping prices low to attract shoppers will remain key for discounters. Vasos said that while Dollar General’s core customer is “feeling better about having a little bit more money in her pocket,” that’s coming from “working more hours, and in some cases, multiple jobs.”

“We’re positioning ourselves for the back half of the year for a little weaker consumer,” Vasos said.

What store closings? While fashion and other retailers including Victoria’s Secret and Gap brand are shrinking their physical footprint, Dollar General, which already had 15,370 stores in the U.S. as of Feb. 1—more than triple the number of stores that larger rival Walmart U.S. has, still sees plenty of room to expand domestically. It said it plans to open 975 stores this year and remodel or relocate 1,100 stores. In comparison, its top rival Dollar Tree, which also owns Family Dollar, had combined 15,237 stores as of Feb. 2.

Still, Dollar General’s growing at a time when Dollar Tree is still seeking to turn around its acquired Family Dollar business. Dollar Tree said recently it’s taken a $2.7 billion write down of Family Dollar and will shut as many as 390 stores under that name, which sell items at different prices like Dollar General, and rebrand some of Family Dollar stores under its namesake label, which sells everything for $1.

“Our proven high returns, low risk model for real estate growth is a core strength of the business,” Vasos said on the call Thursday. “We have a long standing track record of successfully opening hundreds of stores every year that meet our strict return thresholds.”

Yes, the fresh aisle is a key retail battleground. Discount retailers led by Walmart aren’t the only ones counting on fresh grocery and other consumables items to lure shoppers. A key part of Dollar General’s increased spending this year will involve taking more of the distribution of perishable items, mostly fresh and frozen goods, in house. The company said the move, which it calls DG Fresh, will allow it to cut product costs, keep items better in stock and allow it to carry more of the fresh items under both national brands and an expanded private label assortment.

“We expect DG Fresh to allow us to do a better job of tailoring our product selection to fit the needs of our customers, particularly in rural areas,” Vasos said.

Think of the potential opportunity especially when many rural markets are so-called food desert. Dollar General last year also unveiled a line of what it described as healthier food options to cater to increased consumer demand.

Lower-income shoppers also want the convenience and choice of online and self-checkout shopping. While late to the game, Dollar General said it will test an initiative this year to allow shoppers to buy online and pick up in stores. That could help it drive more traffic to stores and boost online sales, an area that retailers including both Walmart and Target have been doubling down on to use their store fleet as an advantage to vie against Amazon.

Dollar General said it’s also expanding its online coupon subscriber accounts beyond the current 15 million plus. In a familiar retail industry pattern, Dollar General said it introduced a DG GO! app last year to allow customers to scan items on their phones as they shop and skip the checkout line by going through a kiosk for the app. While the feature is only available in about 250 stores, Dollar General said it’s seen more than 140,000 downloads and about 25,000 monthly active users.

“Having a user friendly and helpful suite of digital tools is becoming increasingly important to our customers,” Vasos said, adding its customers who use its “digital tools” more frequently on average spend about double the amount of those “non-digitally engaged shoppers.”

High end or low-income, the way consumers want to shop is increasingly similar, and retailers are in a race to answer that need.

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Four Things You Should Take Away From Dollar General’s Earnings