FINANCE

Dollar General to open 900 stores, accelerate remodels in 2018

BY Marianne Wilson

Dollar General on Thursday reported results for the third quarter that beat Street estimates and announced aggressive remodeling plans and new store growth for the coming year.

The discounter will execute approximately 2,000 real estate projects in fiscal 2018. The emphasis will be on remodeling. Dollar General plans to open 900 new stores (compared to an estimated 1,285 new units in fiscal 2017), remodel 1,000 existing sites and relocate 100 stores (compared to 760 combined remodels and relocations this year).

“We continue to believe that investing in the business through our high-return new store growth is the best use of our capital to help drive long-term shareholder value,” said Todd Vasos, Dollar General’s CEO. “Our new store growth is complemented with a significant increase in our store remodel program from fiscal 2017 that we view as an investment to enhance and consistently deliver on our brand promise to help our customers save time and money every day.”

Neil Saunders, managing director of GlobalData Retail, commented that many of Dollar General’s new stores will be located in metro areas.

“This represents a slight shift in focus–but one that we believe presents Dollar General with a significant opportunity,” Saunders said. (For more, click here.)

Dollar General’s net income rose to $252.5 million, or 93 cents per share, from $235.3 million, or 84 cents per share, in the quarter ended November 3, over the year-ago period. Excluding items, the company earned 98 cents per share, beating the average analysts’ estimate of 94 cents.

Net sales increased 11% to $5.90 billion. Same-store sales rose 4.3%, which the company attributed to increases in average transaction amount and customer traffic. The company said hurricane-related sales contributed an estimated 30 to 35 basis points to same-store sales.

“During the quarter, we effectively balanced our same-store sales growth while achieving gross profit rate expansion and continuing our planned investments in the business,” said Vasos.

Dollar General narrowed its fiscal 2017 GAAP diluted earnings per share to $4.37 to $4.47, compared to its prior guidance range of $4.35 to $4.50. The current diluted earnings per share guidance range now includes the estimated net negative impact on the third quarter diluted earnings per share results of $0.05 related to the hurricanes.

For fiscal 2017, the company now forecasts net sales growth of approximately 7%, compared to its prior guidance range of 5% to 7% growth. It also forecasts same-store sales growth of approximately 2.5%, compared to its prior expectation that same-store sales would fall at the upper end of the range of slightly positive to up 2%.

Dollar General operated 14,321 stores in 44 states as of November 3, 2017.

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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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Analysis: CVS-Aetna Could Lead to Lower Heathcare Costs

The merging of CVS Health and insurance giant Aetna is the first, we believe, of many similar deals that ultimately point toward transformative changes in healthcare and optimally, lower costs.

Vertical integration for CVS/Aetna is a strategic move to get ahead with healthcare synchronization, the term used to describe the leveraging of all patient information — medical and pharmacy claims, wearable tech data, demographics, socioeconomic status, education, etc. — to determine the best care path for patients.

CVS/Aetna is in a good position to step into synchronization, given Aetna’s network and experience managing members and CVS’s nationwide brick and mortar presence with both pharmaceutical dispensing and minute clinics, its ability to carve drugs out of high-cost places of service like outpatient/physician office, and its home infusion business.

More Personalized Care
With better medical and pharmacy data, and more information on other variables impacting health status, CVS/Aetna may be able to provide more personalized care — that is, develop more personalized relationships with members — which can help with innovation in care delivery and may help reduce unnecessary care and its attendant costs.

To further reduce pharmacy costs – which typically range from 15 percent to up to 20% of a health plan’s cost structure – CVS/Aetna will likely be looking to drive down costs by developing efficiencies and improving medication adherence, among other strategies.

We expect to see similar deals to this merger, as some insurers will react by looking for opportunities to counter any perceived market changes. Just as the market reacted to the news of possible mega-mergers a year ago, some health plans will react to this merger as a defensive move.

If nothing else, this merger provides further impetus for the big health insurers to look at pharmacy, if they’re not already doing so. Integrating medical and pharmacy can help optimize medication prescription and distribution and better manage processes that were historically rendered by Pharmacy Benefit Managers (PBMs).

Health plans may also be able to provide more member touchpoints and opportunities for patient care. Aligning these areas within one organization can also result in enhanced data and brand recognition for the insurer, improved access for the patient, and a more personalized experience for the consumer.

Efforts to coordinate care and make it more easily accessible and convenient are increasing across various parties in the care continuum. Whether incenting physicians or broader hospital systems, there are a greater number of agreements that emphasize improved overall outcomes and quality for patients when determining reimbursement amounts from insurers to providers.

Beyond contracting relationships, partnerships have been formed via Accountable Care Organizations (ACOs). The CVS/Aetna deal is another example of these organizations working to find ways to better integrate care. The expectation that, when optimized, this integration will lead to better health outcomes, healthier individuals, and therefore lower overall healthcare costs.

Duane Harrington and Maulik Bhagat are respectively senior managing director and managing director in the healthcare practice of AArete, a global consultancy specializing in data-informed performance improvement ([email protected] and [email protected]).

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