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Dollar General and Dollar Tree: The General Marches Ahead

Thomas Paulson
Aug 26, 2022
Dollar General and Dollar Tree: The General Marches Ahead

Some go up, while others go down. Dollar General has been increasing its prices, and thus far, the consumer has gone with them as they remain a bargain. Similarly, Dollar Tree’s new $1.25 price point is also “still a bargain.” Family Dollar on the other hand, is struggling to put forth the right value proposition. The company's 2Q22 update noted that, "Competitive pricing at Family Dollar will over the long term enhance our sales productivity and profitability, and ultimately our opportunity to accelerate store growth. We are therefore making an investment in pricing at Family Dollar. Combined with improvements in merchandising and store standards, we believe we are putting our best foot forward at a time when customers are coming to us to help them navigate difficult times. We expect the combination of this pricing investment at Family Dollar and the shoppers’ heightened focus on needs-based consumable products will pressure gross margins in the back half of the year."

Key Dollar General Metrics

  • Dollar General produced an excellent 2Q22 with respect to sales, traffic gains, market share gains, and profitability. Comparable-store sales increased by +4.6% and the 2- and 3-year CAGRs strengthened. Higher average unit retails (AURs) and positive traffic drove the gains. CEO Todd Vasos shared, "We believe that [investments in both incremental labor hours and wage inceases] contributed to an improvement in our overall in-stock position and our strong sales results." To us, that commentary suggests an improvement in the conversion rate from store traffic. In addition, Vasos stated, "our teams remain focused on controlling what we can control, while continuing to deliver value for our customers, which we believe is seen even more important in the current environment."
  • Vasos also noted that Dollar General "saw additional signs of our core customers shopping more intentionally and closer to need, as well as an increase in trade-down activity. For example, during 2Q22, customers appeared to be making trade-offs of some of their food choices, contributing to an increase in private brand penetration within our consumables business." We would note that while Dollar General's customers are making trade-offs – which we see that in Personal Consumption Expenditures data (as shared below), other more affluent brands such as Macy’s and Nordstrom note the absence of such trade-down behavior. Also of note, part of the traffic increase is that in response to inflation and budgetary and cash flow pressures, DG’s customer is visiting more frequently, but spending on fewer items per trip.
  • On its sales cadence, Vasos also shared that comp-store sales were the lowest in May and strongest in July, with good momentum thus far in August. (Management also raised its sales guidance for the year.) However, we suspect that this cadence largely reflects a volatile base period where stimulus dollars were being spent. shows that the three-year trend has been relatively consistent.

  • Trailing-twelve-month (TTM) sales per square foot increased $5 to $258 and is highly likely to be up mid-single-digits over the next year.
  • Profitability was roughly even on higher markups that were ahead of cost increases and despite a meaningful drop in apparel (-21%) and declines in seasonal and home products, all of which have a higher margin than consumables (+13%). Higher wages and supply chain costs were well managed headwinds. As wages were increased during the quarter, that increase will roll forward over the next year.
  • TTM EBITDA and free cash flow increased to $3.8B and $1.3B, respectively, compared to $2.7B and $1.5B in 2Q19 and are likely to be $300M higher by this point next year.
  • During the quarter 14 new pOpshelf locations were added, bringing the total to 80. In the chart below, we compare the 20 locations opened in in Georgia in 2021 to the 38 Five Below and 276 Dollar Tree locations in the state. As can be seen from the data, the typical pOpshelf location does 70% of the traffic that a Dollar Tree and 50% that of a FiveBelow. As that “gap of opportunity” hasn’t really closed during 2022, it would appear that pOpshelf needs another nudge to capture the opportunity, be it better value, a different merchandise selection, or more marketing. 70 additional pOpshelf locations are planned for the 2H, and 1,000 total planned for year-end 2025.

  • With respect to DG Fresh, Dollar General now sells produce in more than 2,700 stores, with plans to expand this offering to a total of more than 3,000 stores by the end of 2022.
  • As a reminder, Jeff Owen takes over as CEO in November and John Garratt has been promoted to President and CFO. No change in strategy is expected.

Key Family Dollar Metrics

  • Family Dollar’s comparable-store sales increased +2.0%, with ticket up +3.3% and transactions down -1.2%. Consumables were up +4% and discretionary down -4%.
  • Chairman Rick Dreiling stated in relation to Family Dollar, "We have a great deal of work underway to improve the company's culture, designed to build an environment of accountability, empowerment, courageous leadership, transparency and fostering two-way dialogue." Larry Gatta was announced as Family Dollar’s Chief Merchant and John Flanigan as Head of Enterprise Supply Chain. Unsurprisingly given Dreiling’s tenure at Dollar General, both Gatta and Flanigan came from Dollar General.
  • Trailing-twelve-month (TTM) sales per square foot held steady at $210 and is likely to be similar over the next year.
  • Profitability moved significantly lower (to a 1.7% operating margin) due to increased shrink and markdowns, as well as higher payroll and store expense.
  • TTM EBITDA declined QoQ to $688M and is roughly even with 2019’s level. Given the planned price cuts and value enhancements, as well as increased store labor wage increases, TTM EBITDA will be down a lot over the next year, with EBIT near breakeven.  
  • 95 new locations were added in Q2, 24 were relocateded, and 257 renovated, ending at 8,103 locations.

Key Dollar Tree Metrics

  • Dollar Tree’s comparable-store sales increased +7.5%, with ticket up +14% and traffic down -6%. Consumables were up 8%. Of note, the industry-wide helium shortage is resulting in those without helium (for balloons) to be running over 10% below those stores with helium.
  • Trailing-twelve-month sales per square foot increased $3 to $211 and will likely increase by $10 over the next year.
  • Profitability moved substantially higher due to the move to $1.25 standard pricing and store payroll expense decreased (as a % of sales) on the sales increase.  
  • TTM EBITDA increased meaningfully to $2.5B compared to $2.1B last year and over the next year it should increase by another $400M.
  • 32 new locations were added in Q2, ending at 8,128 locations

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Thomas Paulson

Director of Research and Business Development,

Thomas Paulson spent 20 years as a Wall Street analyst and a member of asset management teams at AllianceBernstein and Cornerstone Capital, representing top-50 ownership positions including Target, Home Depot, Nike, Amazon, Google, and many more. He brings consumer related expertise and knowledge of enterprises in retail, CPG, financial services, telecom, and entertainment.

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