Dollar General’s Q1 2023 results encapsulated the consumer dynamics that Dollar Tree, Walmart, and Target reported: there has been a significant curtailment of discretionary spending on goods as household are forced to spend more on food-at-home (FAH) given the persistent rising level of food inflation and a shift to private-label brands that offer more value.
For Dollar General, consumables categories saw a +4.3% increase in comparable sales while non-consumable categories declined -8.5%. CEO Jeff Owen said, “We believe our customers were caught off-guard by the reduced [tax refund] amounts, which exacerbated the inflationary pressures they were already experiencing. Our customers typically use these refunds to repay debt, purchase big ticket items, make repairs, build a safety net in savings or a combination thereof. The changes this year are contributing to their financial insecurity, and many are using lower refunds to simply afford basic household essentials while others are contracting their overall spending…We continue to see signs of increasing financial strain on our customers as they seek affordable options, including increased reliance on private brands and items at or below the $1 price point…And then we're also seeing [them] buy closer to payday in the first of the month.”
Also of note, CFO Kelly Dilts said that the drivers of the reduced earnings guidance for the year were sales and increased shrink. At the start of retailer earnings, we commented that theft/shrink was becoming a much worse problem stemming from social changes, economic stress, and organized crime, we now suspect that another contributor of its rising significance is the ubiquity of shelf checkout options that have become more prominent post-pandemic. (Expanding shelf checkouts was a large initiative at Dollar General over the past two years as a means to manage higher labor costs, as was the case for many retailers.)
Comparable-store sales declined -2% in April and remained soft in May. Another prominent feature from the update is that Family Dollar and Dollar Tree’s increased competitive positioning (recall that Dollar Tree Inc.'s CEO Rick Drieling used to be Dollar General's CEO) is encroaching upon Dollar General. As shown in Placer.ai, Family Dollar and Dollar Tree have consistently seen higher year-over-year visits than Dollar General. As such, softer earnings, reduced guidance (adjusted-EPS mid-point YoY growth to flat from +9%), and -20% stock price correction reflect both macro- and micro-headwinds.
Owen also discussed how Dollar General plans to confront current headwinds. “We are taking action now to better support them both in the near and longer term. First and foremost, we are taking action to provide even more affordable solutions and lower prices for our customers. We are doing this in a targeted fashion on the items that matter most as we believe we can be even sharper within our established target range.” Dilts added, “[New] targeted pricing investment will put some pressure on gross margin.” Dollar General is also accelerating its labor investments (which suggests that they are losing good managers to Dollar Tree) and adding more labor hours to boost service levels and store conditions.
One other “surprise” highlighted by management was that it reduced the number of pOpshelf openings for the year by 60. Readers will recall that we have been highlighting that pOpshelf had seen a drop-off in year-over-year visits per location. Shown below are the average visits per location for pOpshelf, Five Below, and Dollar Tree in Georgia. Dollar General opened two locations in the state in 2020, 17 more in 21, and ended 2022 with 27 locations. As the figure demonstrates, the brand isn’t growing into a Five Below or Dollar Tree; it’s kind of stuck in low gear. Owen noted, "We are prioritizing and optimizing our capital expenditures to maintain flexibility and enhance our focus on the core business. Included in these plans, we have made the decision to moderate our rollout of pOpshelf in 2023 as we now plan to open approximately 90 stores compared to our original expectation of approximately 150 openings. We believe this is a prudent reduction based on the current environment… As a result of our slower pace of openings, we are reevaluating our plans with regards to our timing of reaching 1,000 stores by the end of 2025 and plan to provide an updated expectation at a later date."
As a proof-point of the appeal of treasure hunt and value to consumers these days, something that we discussed when reviewing the results from the off-price retail chains, Five Below produced healthy Q1 2023 results. Placer.ai traffic shows that business slowed post-Easter in April (like a lot of retail brands) before popping in May (unlike a lot of retail brands). Compared to a lot of brands that are cutting marketing costs to preserve profitability, Five Below is spending more (as a percentage of sales) to acquire more customers. Like Dollar General, Five Below cited seeing a monthly paycheck cycle cadence, fewer units purchased per transaction, and customers shopping closer to need.
Five Below's comparable-store sales increase of +2.7% was led by comparable transactions (+3.9%), which was ahead of traffic per location (-0.6%) per Placer.ai. We believe that the visitation-to-transaction delta demonstrates that Five Below’s merchandise and value appealed to shoppers, resulting in higher transactions and an improved conversion rate. Another measure of that connecting with shoppers is the year-over-year improvement in inventory turns and gross margin. For Five Below’s business to hum they need to put ever-fresh merchandise in front of shoppers and be in a liquid position to chase the trend (similar to off-price retailers). Lastly, unlike most retailers that noted significant margin compression in the most recent quarter, Five Below was able to hold its gross margin rate (32.3%).
In its Q1 2023 release, CEO Joel Anderson said, “Looking to the rest of the year, we remain focused on playing offense to drive increased market share. We now plan to open a record 200-plus new stores and complete over 400 conversions to the new Five Beyond prototype in 2023 while building a strong pipeline of new stores for 2024." And from its earnings call, Anderson noted that the company “acquired several leases from other retailers in bankruptcy, positioning us to exceed our original 200-store openings goal.” With respect to new store productivity, CFO Ken Bull said, “We've seen in some recent quarters…90%-plus store productivity performance [and] a couple of stores hitting records for spring grand opening performance…We expect that to continue.” At last week's ICSC conference, we observed that Five Below as one of the busiest retailers exhibiting at the conference. The quarter ended with 1,367 locations, which averaged $2.3M in trailing-twelve-month (TTM) sales (representing $242 per square foot).
Interestingly, Anderson also shared, “I think we are at the point of starting to explore loyalty…Now that we've got some of the base in place to start looking at putting in a loyalty program, I think you got to look at it as 2025, not 2024, and we'll certainly keep you all updated as we start to put that in place. But the groundwork has been laid and as we continue to see more normalization of our business and we're back to playing offense as I called out for several reasons. That's one that is in the pipeline.”