Dive Brief:

• Dollar General’s Q3 net sales rose 2.4% year over year to $9.7 billion, as store comps fell 1.3%.

• Gross margin contracted slightly to 29% from 30.5% a year ago, largely due to higher shrink, lower inventory markups and increased markdowns. Net income plunged 47.5% to $276.2 million.

• The discount retailer added 263 stores in the quarter, ending with 19,726 by Nov. 3. In 2024, the company plans to add 800 new stores, remodel 1,500 and relocate 85.

Dive Insight:

Though Dollar General did better in the third quarter than some had feared, its sales growth owed much to new store openings, analysts said. In fact, taking out new stores, the discount retailer continued to lose market share in the period, according to Wells Fargo analysts led by Edward Kelly.

“We remain concerned about the path of this turnaround given a weak consumable outlook, low-end pressure, the need for significant investment (esp. labor), questions around the sustainability of store growth, and growing competitive headwinds,” Kelly said in emailed comments.

The company has reined in its brick-and-mortar expansion, with plans for 800 new stores compared to the 990 it will have opened in the U.S. this year.

“We believe slowing growth would be prudent given diminishing new store economics, rural saturation, competition, and the need to focus efforts on the core,” Kelly said.

Speaking during an earnings call Thursday, CEO Todd Vasos said more than 90% of Dollar General’s new and relocated stores during the coming months will be in one of its larger formats, which feature more cooler space for food.

Vasos also said Dollar General is taking steps to restock store shelves more quickly, including by “reallocating some of our labor investments toward store-level inventory management processes.” The retailer is also aiming to reduce turnover among store managers as it looks to foster “a more positive experience for our customers as well as improved sales and shrink results,” he said.

In addition, Dollar General is boosting the presence of employees in the front area of stores, especially the checkout area, Vasos said. “While self-checkout has contributed to the convenient proposition for our customers in certain stores, it does not reduce the importance of a friendly, helpful employee who is there to greet customers and assist while the checkout process is happening,” he said.

Speaking during an earnings call Thursday, CEO Todd Vasos said more than 90% of Dollar General’s new and relocated stores during the coming months will be in one of its larger formats, which feature more cooler space for food.

Vasos also said Dollar General is taking steps to restock store shelves more quickly, including by “reallocating some of our labor investments toward store level inventory management processes.” The retailer is also aiming to reduce turnover among store managers as it looks to foster “a more positive experience for our customers as well as improved sales and shrink results,” he said.

In addition, Dollar General is boosting the presence of employees in the front area of stores, especially the checkout area, Vasos said.

“While self-checkout has contributed to the convenient proposition for our customers in certain stores, it does not reduce the importance of a friendly, helpful employee who is there to greet customers and assist while the checkout process is happening,” said Vasos.

With ongoing pressure on the consumer, Dollar General is well positioned to attract customers. Even Dollar General shoppers have cut back on discretionary spending, but the retailer has invested in price, especially on key items, which is helpful, according to GlobalData Managing Director Neil Saunders. This has helped Dollar General to maintain its reputation as a low-price leader, he said in emailed comments.

“Unfortunately, this investment also has an impact on margins but does not have an outsized impact on volumes,” he also said.

While Wells Fargo clocked some degree of market share loss, Saunders said that “Dollar General is not actually losing customers to any significant degree.”

“There is certainly the usual churn in terms of where people shop, but this is no more pronounced than during any other period,” he said. 

For some analysts, the return of Vasos as CEO bodes well for the company’s trajectory. In October Dollar General brought Vasos back to take over from Jeffery Owen, after concluding that it needed to replace Owen “to restore stability and confidence in the Company moving forward.”

Owen joined Dollar General 30 years ago as a store manager and served in several other positions, including executive vice president of store operations, before becoming COO in 2019. He took over from Vasos last year when Vasos retired. That retirement proved to be short-lived.

“While the broader macro environment is causing Dollar General some stress, the company has also lost its edge when it comes to internal operations,” Saunders said. “We feel that areas like inventory, store standards, and assortments have all slipped over the past year. Ultimately, this is worsening the proposition for customers, and it is eroding Dollar General’s characteristic efficiency. Fortunately, we believe that Todd Vasos is a very savvy operator and will act quickly to remedy these problems.”