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Dollar General and Five Below: Food Inflation Continues to Whack Retail, Expect Retail to Push Back

Thomas Paulson
Sep 1, 2023
Dollar General and Five Below: Food Inflation Continues to Whack Retail, Expect Retail to Push Back

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Dollar General

Reflective of the inflationary pressures on less affluent households and the more competitive environment (including Walmart, Dollar Tree, and Family Dollar), Dollar General once again missed their plan and lowered guidance. Earnings are now expected to be down around -30% for the year, which reflects a softer sales outlook (apparel and home categories saw comparable store sales decline roughly 10%), higher theft-shrink, and significant investments in price and store service levels and standards (all areas of increased investment by Family Dollar and Walmart). Given these, it will be very difficult for any supplier, especially in consumables, to push for higher prices with Dollar General; in fact, many will be asked to roll back their prices. (See our above comments on the Federal Reserve and inflation.)

For the quarter, Dollar General's comparable traffic and transactions were down. Comparable-store sales were up in May and down in June/July. While traffic did improve in late June and July, as shown below, it has again slumped. Comparable-store sales are also down in August, as was comparable-store ticket.

Consumables comparable-units were also down and units are proportional to calories consumed, and so, households are going somewhere else to get their calories. Where are the customers going? Our data suggests that it's Family Dollar (see our review here), Walmart, Aldi, other deep discount grocers, and convenience stores. As the table below shows, these names are meaningfully out-comping Dollar General and they are all selling a lot more consumables units. Less affluent households are also just cutting back on discretionary trips, which is reflected in the down 10% comps for these categories at Dollar General (also down at Family Dollar and Walmart).


In describing the initiative intended to improve trends, CEO Jeff Owen said, “We are pleased to note that our service levels, in-stock levels, and on-time delivery rates from our distribution centers have all returned to the levels we saw before our capacity challenges began last year...We accelerated our investment in incremental retail labor during the second quarter. While the investment in labor hours was initially allocated across the store base, we also strategically deployed additional hours to a set of focused stores based on the areas of greatest need and opportunity and also through high-performing teams in each district that could assist in stores where they were needed the most. While early, we are pleased with the impact of these labor investments, including the positive impact on overall customer satisfaction and store standards...We are increasing our planned investment in incremental retail labor from approximately $100M this year to approximately $150M… Finally, the pricing actions we completed in the second quarter as we make targeted price reductions on key items that matter most to our customers to provide them with even more affordable solutions. We have been pleased with the customer response both in terms of basket size and composition…[and] have further solidified our strong pricing position relative to competitors and other classes of trade, and we feel great about our strong value proposition.”

In terms of other business KPIs, gross margins declined due to price reinvestments, increased shrink, increased markdowns, and sales mix. That lower margin, combined with the higher labor investment resulted in a material erosion in profit margin and a -24% decline in operating profits for the quarter. Inventory levels are too high (3.1x turns compared to pre-pandemic levels above 4.0x). As a result, Dollar General is going to increase its clearance activity in the 2H.

On shrink, CFO Kelly Dilts said, “The shrink environment has continued to worsen. We now expect approximately $100 million of additional shrink headwind since last quarter's call. While we expect this pressure to continue for the remainder of the year and recognize this is a challenge throughout retail, we are actively working to reduce these levels through multiple targeted actions. These include reducing our inventory position, refreshing and refining our processes, leveraging additional tools and technology and improving execution in our stores.” (We continue to believe that heightened level of theft is also partly due to the high level of food costs. Should food costs (i.e., packaged food) reset lower, we would expect to see a positive inflection point towards less theft and shrink.

On real estate, Owen noted, “We will sharpen our strategic focus...First, we are focused on winning in rural. Today, approximately 80% of our stores serve rural communities with fewer than 20,000 residents. Our high-return, low-risk real estate model continues to serve us well as a core strength of the business. In the second quarter, we completed 849 real estate projects, including 215 new stores, 614 remodels and 20 relocations. For 2023, our plan remains to execute 3,110 real estate projects in total in the U.S., including 990 new stores, 2,000 remodels and 120 relocations. We now expect over 80% of our new stores in 2023 and nearly all of our relocations will be in one of our larger store formats, which continue to drive increased sales productivity per square foot as compared to our traditional store...During Q2 2023, we added more than 19,000 cooler doors across our store base, and we plan to install a total of more than 65,000 incremental cooler doors in 2023. And while produce is not currently serviced by our internal supply chain, we continue to believe that DG Fresh provides a potential path forward to expanding our produce offering to more than 10,000 stores over time. We know this offering is important to customers, especially in rural areas.” (Recall that more coolers and rural is now also a focus of Family Dollar.” Also of note, pOpshelf was not discussed. pOpshelf’s visits per venue were down -11.5% for the quarter. (See our summary on that format here.)


Five Below reported another set of strong top-line figures fueled by lots of "Wow!" treasure hunt for its customers, but also a "Wow!" for shareholders and analysts as management lowered earnings expectations to account for a greater level of shrink-theft. Per CEO Joel Anderson, categories driving growth were “Squish, Hello Kitty, Anime, Collectibles and our version of consumables, including candy, snacks and beverages. Our teams also captured the popular Swifty trend with stylish clothing, jewelry, such as friendship bracelets and beauty products. Finally, we were thrilled to see licenses begin to grow again as new movie releases like the Super Mario Brothers in April and Barbie in late July drove customers into theaters in our stores. In anticipation of a successful release of the Barbie movie, our buyers were able to source several Barbie-related items, including a mini styling head, beauty sets and even Barbie dolls, all selling for only $5.”

As it relates to back-to-school, Anderson noted, “We are also seeing success with the start of the second half, which kicked off with a solid back-to-school season. A notable call out is backpacks at Five Below, a staple that we infused with newness each year...[T]his year, we introduced clear backpacks, expanded our license assortment and added coordinated patches and key chains for customers to personalize their backpacks.”

In terms of business KPIs, Five Below experienced an acceleration in traffic (below) as well as improved comparable transactions (+4.5%) and inventory turns (to 3.7x). (Per the above traffic gains, remember that fueling most of these gains is +12% more locations on a year-over-year basis.) These KPIs produced solid levels of profitability and cash generation.

On shrink, CFO Kristy Chipman said, “We're currently conducting interim physical inventory counts on a subset of our stores and anticipate results will reflect the negative trends seen across the industry. Therefore, we believe it is prudent to increase our shrink reserve for the balance of the year, and we expect a significant impact in the third quarter due to the anticipated year-to-date true-up and higher rate compared to last year...We are working on several shrink and operational initiatives throughout the organization to help mitigate the increased expense.” Anderson added, “I do think we've seen pretty much the high water mark. The difference is now is a year ago, we weren't doing anything about it. In June, we put in a new return policy. We've changed our damages policy. So all the mitigation efforts we are putting in just started. And the fact remains that all retailers are seeing this… And so where is it coming from? It's coming in from all angles. And you've got several cities now, which just simply aren't prosecuting below the $500 level. Sadly, our hometown here in Philly is a city that's seen some of our highest shrink rates...And so while I don't think we're yet at that extreme of closing Five Below stores there, these are the type of mitigation strategies that will be included as we consider what to do if we don't see things improve.”

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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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