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Dollar General Plots Sourcing Expansion, 1,050 New Stores in 2021

Dollar General had a monster third quarter, with the company not only seeing sales jump 17.3 percent to $8.2 billion and net income increase 57.1 percent to $574.3 million, but achieving its 10th-straight quarter of comparable sales growth in its non-consumable products, which consist of categories including home, domestics, housewares, and party and occasion goods.

In a Nutshell: Dollar General is accelerating its brick-and-mortar expansion plans in 2021 at warp speed, with 2,900 real estate projects planned, including 1,050 new store openings, 1,750 remodels and 100 store relocations.

This is an even bigger investment than what it had planned for 2020, which is still on track for 1,000 new store openings, 1,670 remodels and 110 store relocations for a total of 2,780 real estate projects. For the first three quarters, Dollar General has opened 780 new stores and remodeled 1,425 stores.

As part of the company’s expansion, it is eyeing overseas sourcing as an important gross margin opportunity, with chief operating officer Jeff Owen indicating in a third quarter earnings call that the company continues to “pursue opportunities to increase our foreign sourcing penetration while further diversifying our countries of origin.”

Owen did not indicate what countries Dollar General has in mind for sourcing expansion. Due to the ongoing trade tensions between the U.S. and China, the company began tapering down sourcing from China last year, cutting products imported from the country by 7 percent throughout the year. As of March, Dollar General sourced products from more than 35 countries, including Mexico, Vietnam, Cambodia, India and other Southeast Asian countries—up from nine countries at the end of 2018.

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The company opened the first two of its Popshelf concept stores in Hendersonville and Clarksville, Tenn., in the quarter, and has a goal to open approximately 30 stores by the end of 2021, with CEO Todd Vasos saying that Dollar General is “encouraged by their initial results.” The Popshelf stores are designed to offer a “treasure hunt” experience including more non-consumable product categories with “continually refreshed merchandise,” and are tailored for higher-income consumers in suburban communities.

Dollar General continues to focus on expanding its offering of higher-margin non-consumable items, which were available in 5,200 of the company’s nearly 17,000 stores at the end of the quarter. Home products had the largest percentage increase in same-store sales in the quarter, the company said.

The retailer expects to expand its “Non-Consumables Initiative” (NCI) to nearly 5,600 stores by the end of the fourth quarter.

Dollar General is also pursuing supply chain efficiencies through the continued expansion of its private fleet of delivery trucks, the opening of more DG Fresh cold storage facilities and construction of a 630,000 square-foot distribution center based in Walton, Ky., which will exclusively store and ship dry goods and serve 800 stores. The discount retailer also recently began construction on its first dual-purpose DG Fresh/dry goods distribution center in Blair, Neb., which is expected to complete construction in early 2022.

As of Oct. 30, total merchandise inventories for the third quarter were approximately $5 billion compared to $4.5 billion in the year-ago quarter, an increase of 5.9 percent on a per-store basis.

Dollar General underwent a full-scale expansion of its DG Pickup buy online, pick up in-store (BOPIS) service in the third quarter, with the offering jumping from 2,500 stores at the end of the second quarter to nearly all 17,000 stores, Vasos said. The company accelerated the rollout of self-checkout machines to more than 900 stores, up from 400 quarter over quarter. The company also aims to expand its DG Go mobile “scan and go” checkout option into more locations.

Due to the uncertainty stemming from the Covid-19 pandemic, Dollar General is not issuing updated fiscal 2020 sales or earnings per share guidance.

Like other retailers throughout the holiday season, the company anticipates higher transportation and distribution costs in the fourth quarter due to a tight carrier market stemming from driver shortages and a greater demand for third-party carriers.

Net sales: Overall net sales at the discount retailer increased 17.3 percent to $8.2 billion in the third quarter compared to $7 billion in the third quarter of 2019. The net sales increase included positive sales contributions from new stores and growth in same-store sales, modestly offset by the impact of store closures.

Same-store sales increased 12.2 percent in the quarter, driven by an increase in average transaction amount and partially offset by a decline in customer traffic. Same-store sales increased in each of the consumables, seasonal, home products and apparel categories, with the largest percentage increase in the home products category.

The company also previewed its fourth quarter, indicating that from Oct. 31 through Dec. 1, same-store sales increased approximately 14 percent from last year’s time period.

Net earnings: Dollar General reported net income of $574.3 million for the quarter, an increase of 57.1 percent compared to the $365.6 million earned in the year-ago period. Diluted EPS increased 62.7 percent to $2.31, from a diluted EPS of $1.42 in the third quarter of 2019.

Gross profit as a percentage of net sales was 31.3 percent in the third quarter, up 178 basis points (1.78 percentage points) from 29.5 percent in last year’s quarter. This rate increase was primarily attributable to a reduction in markdowns as a percentage of net sales, higher initial markups on inventory purchases, a greater proportion of sales coming from non-consumables and a reduction in inventory shrink as a percentage of net sales.

Operating profit for the third quarter increased 57.3 percent to $773.1 million compared to $491.4 million in the third quarter of 2019, including approximately $38 million of incremental investments the company made in response to the Covid-19 pandemic. These investments included measures taken to further protect the health and safety of employees and customers, and approximately $25 million in appreciation bonuses for eligible frontline employees.

CEO’s Take: Dollar General is seeking to attract a wider base of consumers, with the discount retailer seeing an increase in new customers on a year-over-year basis that are “adjacent to our core customer.”

“These new customers skew younger, higher-income and more ethnically diverse, further underscoring the broadening appeal of our value and convenient propositions,” Vasos said in the call. “We are also encouraged by the repurchase rates of new customers and are working hard to retain them with more targeted marketing and continued execution of our key initiatives.”