🏬 Is Dollar General “Upgrading” Its Strategy?

🏬 Dollar General: An “Upgrade” In Strategy?

Variety store chain Dollar General Corp. (DG) wants to target the wealthier, suburban shopper. It plans to have 1K of its upmarket Popshelf stores by fiscal 2025. Ambitions and expansion plans aside, some unimpressive earnings commentary from the management left investors disappointed. (Tweet This)

Private Vs. Public Seesaw

James Turner started his business, JL Turner and Son, in 1939 with an initial investment of $5K. The elder Turner went about buying bankrupt general stores during the great depression. In the next fifteen years, Turner owned over 35 stores in Kentucky and Tennessee. In 1955, the company had its turning point.

The younger Turner, Cal, inspired by the “Dollar Days” promotions at other departmental stores,  conceived the idea of a retail store selling goods for only $1. The first “Dollar General Store” was opened in Springfield, KY, and the business was renamed Dollar General Corporation. It went public in 1968 with sales of over $40M and a net income of $1.5M.

Cal Turner Jr. succeeded his father in 1977 and ran the company until retirement in 2002. Under him, Dollar General grew to over 6K stores and over $6B in annual sales. In August 2007, the company was taken private by a clique of PE investors, including KKR, Goldman Sachs, and Citi Group, for $7.3B. Two years later, the company had its second IPO in August 2009.

Today, Dollar General has over 17K stores across 46 states in the US. Its strategy has been to offer low prices on brand-name goods, a smaller store format, and focus on smaller markets with limited alternatives. For example, ~40% of US shoppers shop at Dollar General, with its average customer having a high school diploma and earning less than $40K per year.

Last October, in a major strategy shift, the company launched a new store aimed at wealthy shoppers. The store, named “Popshelf” featured home decor, beauty items, cleaning supplies, party goods, etc., in an area of 9K square feet and items costing $5 or less.

The target market for such stores was women living in the suburbs with an annual income ranging from $50K to $125K. The first two stores opened in Nashville, TN. The company has expanded from two to 30 such Popshelf stores across six states in the past year.

Here, There, Everywhere!

The company now plans to have 1K such stores by fiscal 2025. The management credits the “huge popularity” of the Popshelf stores behind their ambitious expansion plans.

The CEO Todd Vasos also sees an opportunity to foray into healthcare, given that more than 10K Dollar General stores are in the hinterland where people need to drive long distances to get medical care. Earlier this year, it hired its first Chief Medical Officer, Dr. Albert Wu. Dollar General plans to add healthcare products such as dental supplies to cold and cough medication to its shelves.

The company is also adding meat and meat products in over 1.3K stores or 7% of its overall footprint, with plans to expand this offering to 10K stores. It is also testing a “store-within-a-store” format by opening 14 smaller Popshelf versions inside DG Markets – a larger format Dollar General Store. The company is on track to open 1.1K new stores, including 10 in Mexico, in the coming year.

In Q3, the company beat estimates, but management also predicted same-store sales to drop by 2.5% to 3% this fiscal year.

Key Highlights From Q3:

• Revenue: $8.52B Vs $8.50B expected
• EPS: $2.08 Vs $2.01 expected

Dollar General also has to counter increasing inflation which may dent the pockets of its target market. Higher input costs may also put pricing pressure on the company itself. For example, its competitor, Dollar Tree, has already increased the minimum price of its products to $1.25 from $1 to counter rising freight costs.

Dollar General shares have also underperformed, rising just 6% compared to the 28% rise in Dollar Tree’s shares this year. Nevertheless, it remains to be seen how the new ambitions of Dollar General pan out and whether the investment and patience of its investors are worth every dollar!

Market Reaction
DG ended at $222, up 2.87% after Thursday’s 3% drop.

Company Snapshot 📈

DG $222.00 +6.19 (2.87%)

Analyst Ratings (28 Analysts) BUY 78%  HOLD 11%  SELL 11%