Did Dollar General’s Back-to-Basics Plan Move the Retailer Forward in Q2?
While Dollar General Corp. continued to make progress on its back-to-basics plan in the second quarter, ended Aug. 2, the company was not satisfied with its overall financial results.
Net sales increased 4.2% to $10.2 billion in Q2 compared to net sales of $9.8 billion in last year's second quarter. “Importantly, despite a weaker sales environment for our core customer than we had anticipated, we continue to grow market share in both dollars and units in highly consumable product sales,” said CEO and Director Todd J. Vasos during the company’s earnings call.
Same-store sales increased 0.5% during the quarter, which was below expectations. The increase was driven by a 1% growth in customer traffic and was partially offset by a 0.5 point decline in average transaction amount, which was driven by lower average unit retail price per item.
“The comp sales increase was driven entirely by the growth in our consumable category, as customers continue to focus their spending on the items they need at most for their families,” said Vasos. “This growth was partially offset by declines in our seasonal home and apparel categories.”
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Same-store sales growth was strongest in June before turning negative in July, notably, the three softest comp sales weeks of the quarter were the last week of each of the calendar months.
“This pattern suggests that our customers are less able to stretch their budgets through the end of the month,” commented Vasos. “With that in mind, as well as our continued softness in discretionary sales in our own customer data and survey work, we believe the softer-than-anticipated sales performance in Q2 is at least partially attributable to a core customer that is less confident of their financial position.”
He explained that the majority of the retailer’s customers say that they feel worse off financially than they were six months ago as higher prices, softer employment levels and increased borrowing costs have negatively impacted low-income consumer sentiment.
“As a result, our core customer who contributes approximately 60% of our overall sales comes predominantly from households earning less than $35,000 annually,” said Vasos. “Inflation has continued to negatively impact these households with more than 60% claiming they have had to sacrifice on purchasing basic necessities due to the higher cost of those items, in addition to paying more for expenses such as rent, utilities and health care. More of our customers report that they are now resorting to using credit cards for basic household needs and approximately 30% have at least one credit card that has reached its limit.
“While middle and higher income households are seeking value as well, they don't claim to feel the same level of pressure as low-income households,” he continued. “As customers have felt more pressure on their spending, we have also seen corresponding elevation in the promotional environment beyond what we had anticipated coming into the year.”
Though Dollar General continues to be confident about its low price position relative to competitors, the increased promotional activity has pressured both sales and gross margin, and the company anticipates this will likely continue for the duration of the year.
For Q2, gross profit as a percentage of sales was 30%, a decrease of 112 basis points. This decrease was primarily attributable to higher markdowns, more inventory damages, a greater proportion of sales coming from the consumables category and increased shrink.
Operating profit for Q2 dropped 20.6% to $550 million. As a percentage of sales, operating profit was 5.4%, a decrease of 168 basis points.
Total non-consumable inventory decreased 13% compared to last year and lowered 17% on a per store basis.
Amid its less-than-stellar quarter, Dollar General remains committed to its back-to-basic strategy, which, as Vasos explained “focuses on controlling the things that we can control, including a timely and accurate supply chain, in-store execution and customer-centric merchandising.”
The company has already begun taking action to strengthen its position over the back half of the year. This includes increasing the employee presence at the front end of stores to ensure an elevated level of engagement with customers. Dollar General also focused labor hours on perpetual inventory management in stores to improve in-stock levels and support sales growth.
Dollar General’s efforts in the supply chain have led to higher OTIF (on-time and in-full truck delivery) levels compared to the same time last year.
The company has also reportedly made good progress in optimizing its distribution capacity. It previously announced plans to close 12 temporary facilities by the end of the year. Dollar General has already exited 11 of these buildings, and now believes it can close at least two more by the end of this year.
While closing the less efficient temporary facilities, Dollar General has built and opened two new permanent distribution centers in Arkansas and Colorado. The company expects both to ramp up operations in the coming months and to contribute to a reduction in stem miles and lower transportation costs over time.
In regards to merchandising, Dollar General began work toward a net reduction of approximately 1,000 SKUs by the end of the year, and it is on its way to meeting that goal. Merchants are also working with operators to reduce activity and simplify work inside the stores. For example, Dollar General has reduced the number of floor stands by approximately 25% through the first half of the year, and it anticipates removing more than 50% by the end of the year.
“Moving forward, we believe our back-to-basic actions will drive improvements in customer satisfaction, including on-shelf availability and convenience, further enhance the associate experience in stores, including improved employee engagement and retention, and ultimately drive improvements in financial results in 2025 and beyond,” said Vasos.
Dollar General remains on track to deliver on its plans of approximately 2,435 real-estate projects this year, including 730 new stores, 1,620 remodels and 85 relocations.
As of May 3, Goodlettsville, Tenn.-based Dollar General operated 20,149 Dollar General, DG Market, DGX and pOpshelf stores across the United States, and Mi Súper Dollar General stores in Mexico. The company is No. 17 on The PG 100, Progressive Grocer’s 2024 list of the top food and consumables retailers in North America.
