Dollar General‘s (NYSE: DG) fiscal first-quarter 2018 earnings report, issued on May 31, depicted a healthy start to the year, though performance was slightly marred by at least one external factor.
During the last three months, comparable-store sales, or “comps,” rose 2.1%, as an increase in average transaction size offset negative customer traffic growth. We’ll delve into the traffic dip, among other key topics, directly below, as we review points made by CEO Todd Vasos during management’s earnings conference call with analysts on the 31st.
1. Our results were constrained by the weather
Our first quarter comp included the impact of unseasonable weather in late March and April, which we believe negatively impacted our non-consumable categories, particularly among Spring and Summer products. Consumables which represent 75% of our business were also impacted by weather…
In the quote above, Vasos explains that the negative traffic trends were the result of unseasonably cold weather in the latter part of the quarter (the first quarter encompasses the three months ended May 4, 2018). However, Dollar General’s chief executive reassured investors by relaying that subsiding weather issues gave way to a “very strong start” to the second quarter during the month of May.
Poor traffic within the overall comps number was one of the chief factors that appeared to catch investors off guard upon the first-quarter earnings release. Shares declined 9.4% on May 31, although they’ve since made up most of this ground.
Overall, Dollar General reported a fairly robust quarter — revenue expanded 9% on the strength of new store openings, and management affirmed previously stated current-year earnings targets. Thus, the higher comps in May underscore management’s characterization of traffic weakness as transitory.
2. Food expansion remains a priority
We continue to strategically invest in our mature store base. We are particularly focused on remodeling stores that have fewer than 12 cooler doors. These store remodels typically drive among the highest returns.
Dollar General continues to broaden its food offerings to compete with grocery stores, and refrigerated coolers within stores is a quantitative focal point for executives. Vasos informed investors that by the end of this fiscal year, Dollar General will have doubled the number of cooler doors within the company’s nearly 15,000 locations, from an average of 10 in 2012, to roughly 20 in 2018. The dollar retailer will install 20,000 cooler doors across its mature store base this year alone. The reasoning behind the push is simple, as Vasos noted: Stores with additional coolers see increases in both average basket size and customer visits.
3. Update on shipping efficiencies
While we have seen carrier rates and fuel costs on the rise, we believe our ongoing efforts to improve efficiencies and reduce expenses can partly offset our expense and exposure to these headwinds.
During the current earnings season, the rise of freight shipping costs was widely cited by both manufacturers and retailers as a headwind against gross margin. Dollar General’s management has discussed this trend in several recent earnings calls. In the current quarter, Vasos announced that the company’s 16th and 17th distribution centers are currently being built in Longview, Texas, and Amsterdam, New York.
Beefing up distribution infrastructure whittles away at the total distance goods must travel to reach stores. Additionally, management has decided to expand the company’s private carrier fleet from 80 tractors (i.e., large trucks used in tractor-trailer combinations) at the end of calendar 2017 to 200 tractors by year-end 2018. Management believes this investment will help insulate the retailer from third-party carrier rate fluctuations.
4. New plans for private-label goods
Our private brand strategy focuses on enhancing product perception and demonstrating the unique nature, superior value and quality compared to national brands.
We intend to use our in-store merchandising expertise to highlight the value pricing and our 100% satisfaction guarantee as we believe both resonate with our customers. We currently have approximately 40 unique private brand product lines.
In a recent article, I discussed Dollar General management’s desire to increase the company’s higher-margin private-label program. During the first-quarter call, Vasos announced that the company is now offering food choices in the so-called “better for you” category, featuring a new private label dubbed “Good and Smart.”
Good and Smart aims to put healthier food products within reach of Dollar General’s budget-conscious patrons, and will eventually represent 75% of the organization’s better-for-you products. I believe this is a wise initiative, as clean-ingredient packaged foods are likely to meet an untapped demand within the company’s core customer base.
Dollar General is also extending its beauty products category by rebranding in-house beauty products under the new moniker “Studio Selection.” Vasos implied that through packaging and design, Studio Selection will gain traction with “key demographics” — presumably millennials. Executives have recently expressed keen interest in dialing up Dollar General’s offerings in the profitable beauty category. Thus, investors can expect to hear more details not just on the overarching private-label program, but on the Studio Selection effort specifically, in the following quarters.
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