FINANCE

Analysis: Economy, competitive dynamics moving in Dollar General’s favor

Dollar General capped a very strong year with another outstanding set of sales numbers. The 8.5% growth in total revenue was aided, in large part, by a soft comparative from the prior year and the early release of government SNAP assistance. However, even without these helpful dynamics, the company would still have turned in a solid growth rate as it continues to take a greater share of wallet from existing consumers and attracts new shoppers to its stores.

The one downside came from the bottom line where net income shrank by almost a third. As disappointing as this is, we do not view it as particularly problematic as it is the result of a higher income tax provision over the prior year when Dollar General received a tax benefit. Indeed, gross profit, operating profit and income before tax all made gains over 2018, indicating that the company continues to advance despite many external cost pressures.

Aside from the benefit from SNAP payments, Dollar General succeeded in taking a higher share of its core customers’ disposable income over the fourth quarter. This was down to two main factors. First, the increase in fresh and chilled produce in stores which continues to lift average transaction values. Second, a strong performance in non-food over the holiday period, especially in categories like gifting. Our data show Dollar General achieved its highest ever shopper penetration for Christmas gifts, largely thanks to an enhanced line up of products which included brands like Lego. This no doubt allowed Dollar General to maximize the benefit from the demise of Toys “R” Us.

Dollar General also benefitted from a higher share of customers in the fourth quarter as it continues to expand its reach through both new stores and strong marketing. However, we also detect that shoppers are becoming slightly more frugal as the economy tightens which is easing up customer numbers as people look to cut back on everyday spending. This is nowhere near the levels seen in 2008 and 2009, but it is nonetheless beneficial, especially in terms of delivering more middle-income consumers through the doors.

Overall, we remain impressed by Dollar General’s ability to create a compelling and enhanced shopping experience. Admittedly, stores remain fairly basic, but they are well merchandised, have good stock levels, and categories like beauty and healthy food are being enhanced. Our data shows that against some mainstream supermarkets, Dollar General is now rated higher for the quality of the general shopping experience – which is both a credit to its own initiatives and an indictment of the lack of investment from those other retailers.

Looking ahead, there are some threats on the horizon, rising costs foremost among them. However, we remain satisfied that Dollar General has initiatives in play to mitigate this – including staff productivity enhancements, a push to higher margin own label products, and increasing distribution efficiencies. In our view, these should help offset the deteriorating cost environment. Even so, we believe profit as a proportion of revenue may slip as sales of lower margin perishables increases.

Overall, Dollar General remains a very credible retailer. It has a clear strategy and a clear market position, both of which are serving it well. Moreover, the economy and competitive dynamics – especially the problems at rival Dollar Tree – are tilting in its favor in 2019.

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