Dollar General's Soft Patch

Published in CSP Daily News

Despite record sales, gross margin sinks on tobacco, merchandise-mix shifts, other factors

By  Samantha Oller, Senior Editor/Special Projects Coordinator

GOODLETTSVILLE, Tenn. -- Calling it "quite an achievement" given the amount of work involved--acquiring licenses, developing plan-o-grams, finding and installing fixtures, shipping inventory and training employees--Rick Dreiling, chairman and CEO of Dollar General Corp., said during a first-quarter 2013 earnings call that the chain's rollout of tobacco products is on track to have at all of its more than 10,000 locations stocked before the end of the second quarter.

"In addition, we have reconfigured the front end of the store to facilitate the sale of tobacco, including the addition of more impulse items," he said. "Much like raising of the shelf height profile to 78 inches, this effort has been a great example of successful cross-functional execution at Dollar General."

Noting that one-third of tobacco purchases include no other item in the basket, he said, "We continue to gain insights into the tobacco category and how we think it will contribute to traffic and sales over time."

For the remaining two-thirds of baskets featuring tobacco plus one or more items, the average size is more than $17. "Based on our experience, we expect that the percentage of baskets with tobacco will continue to ramp up over the next several months," he said.

When asked if the overall sales contribution or margin impact from tobacco has shifted, Dreiling said it was too soon to say. "While I've got the cigarettes installed in 10,000 stores, we haven't really reached the stage of the game where I'm selling them there yet," he said. For now, execs see nothing "out of the ordinary."

The first quarter of 2013 was a dicey one for Dollar General, which hit a sales milestone even as its gross-profit as a percentage of sales dropped.

"The best way to judge the health of a retailer for this quarter is based on the strength of his core business," said Dreiling. "For us, that would be our consumable business, and we delivered a strong same-store sales improvement in this category." Total sales grew 8.5% to hit a record $4.2 billion. Same-store sales rose 2.6% as traffic and average ticket increased for the 21st consecutive quarter. For full-year 2013, the company expects same-store sales to grow 4% to 5%.

Sales of nonconsumable or discretionary categories, however, were soft--which the company anticipated, considering weather issues, the increase in the payroll tax, and headwinds from tax refund delays. It updated its outlook to reflect a revised sales estimate and gross-margin compression.

While gross-profit dollars grew 5% for the quarter, Dollar General saw an 89-basis-point drop in the gross profit rate to 30.6% of sales. Execs chalked the drop up to a growing mix of national brands versus private label, higher markdowns, a higher consumable mix, an increase in inventory shrink and lower initial markups. The company is forecasting gross-margin contraction for the entire year because of a sales-mix shift in consumables to lower-margin items, higher inventory shrink and soft sales of non-consumables.

And although total shrink units per store continued to fall, financial shrink grew because of an increased loss of SKUs greater than $5 at retail—for example, health and beauty items. "While these high-value items are generating greater shrink, they are also driving increased sales and higher-margin dollars," said CFO David Tehle. "We're now forecasting that this negative shrink trend will not turn around in 2013."

To combat shrink, Dollar General is installing defensive fixtures with labeling, and just completed shrink training workshops for field management.

In terms of tobacco's role in the 89-basis-point drop in gross margins, Tehle said it was the leading factor, when comparing first-quarter 2012 to first-quarter 2013 performance. From there, a shift to lower-margin consumables, lower nonconsumable sales and then shrink--in that order--provided a drag.

One thing not slowing down: Goodlettsville, Tenn.-based Dollar General's store openings. At the end of first-quarter 2013, the chain had more than 10,600 stores in 40 states, within reach of a milestone of 11,000 stores. In 2013, it has plans to open around 635 new sites and to remodel or relocate approximately 550. Most new stores are equipped with 16 cooler doors, and the chain plans to grow the number of coolers in 1,700 existing locations.

By Samantha Oller, Senior Editor/Special Projects Coordinator
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