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Analysis: Dollar General remains one of the success stories of U.S. retailing

After a soft start to the year, Dollar General is finally back on track with much stronger sales numbers. The 11% rise in net revenue is impressive and reflects both ongoing fleet expansion and various initiatives to improve the productivity of existing shops. The 4.3% increase in comparable sales is evidence that the store based programs are working.

Although Dollar General trades primarily on price, it has another, often overlooked advantage: convenience. With well over 14,000 stores across the U.S., almost 75% of the population now live within 5 miles of a Dollar General store. This makes the company the closest and most convenient general merchant for millions, especially those living in rural areas.

Dollar General’s forward opportunity is to capitalize on this convenience by persuading more shoppers, and especially those outside of its core target market, to visit stores. This has been one of the focal points of the various store initiatives, and we are encouraged by the early progress, with our data showing the company is capturing a more significant share of spending from middle income and more affluent Americans.

Optimizing the product assortment, including bringing in more branded products, has allowed Dollar General to shift quality perceptions — especially among non-traditional shoppers. The move has also helped Dollar General increase average transaction values. Meanwhile, the introduction of fresh in a handful of remodeled stores appears to be working well, improving both customer traffic and spending. In our view, rolling fresh out across the bulk of the estate would give Dollar General more of a destination status — although executing this in some of the smaller stores may prove challenging.

Dollar General has also been developing product categories where it feels it is underperforming in terms of market share. One of these areas is beauty, and as our data show this is indeed an area of relative weakness for the chain. To capitalize on this latent opportunity, Dollar General has redesigned the cosmetics area in many stores to showcase on-trend products better. Improvements have also been made to health and wellbeing ranges. Early indications suggest that these changes are working well and are driving up market share.

The focus on improving the existing fleet has not come at the expense of store expansion. Indeed, Dollar General has already signaled that it expects to execute over 2,000 real estate projects in 2018 resulting in the opening of at least 900 additional stores. Many of these will be in metro areas, which represents a slight shift in focus — but one that we believe presents Dollar General with a significant opportunity.

The frantic activity does come with costs attached. However, these are not too much of a concern as Dollar General makes fast returns on both its new stores and its improvement and remodeling programs. Underlying cost increases, including higher salaries, are a little more worrying and continue to act as a drag on margins and profit growth. However, we maintain that it was right for Dollar General to invest more in staff. We are encouraged that it will attempt to find efficiencies elsewhere to offset the costs.

Looking ahead, we expect Dollar General to feel the continued heat of cost increases in the next couple of quarters. However, a much firmer sales trajectory will help alleviate some of this pressure. Overall, Dollar General remains one of the success stories of U.S. retailing.

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