Bargain retailer's new concept exceeded sales expectations, CEO says
The pandemic was so fruitful for discount retailer Dollar General last year that the company doesn't think sales will be on the same level in 2021, even though it plans to tackle 3,000 real estate projects including building larger stores this year.
The Goodlettsville, Tennessee-based company projected overall sales to be flat or down 2% this year, according to the company's earnings report Thursday. Same-store sales could be off 4% to 6%, said Dollar General, the nation's largest dollar store chain.
Dollar General is coming off a strong year since its stores stayed open during the lockdowns early in the pandemic because they were deemed essential businesses. As a result, the retailer's real estate has grown increasingly popular among investors looking for properties with tenants that are considered less risky.
Dollar General plans to build 1,050 new stores, relocate 100 stores and remodel 1,750 locations this year. Last year, it completed 2,780 real estate projects, taking its store count to 17,000. Competitor Dollar Tree Inc., the Chesapeake, Virginia-based parent company of Dollar Tree and Family Dollar, with 15,288 stores in the United States and Canada, has similar real estate plans in the works this year.
Dollar General rolled out Popshelf last year, a concept targeting middle-income, frugal shoppers. Some 95% of the items it sells are priced at $5 or less. Two test locations opened in Middle Tennessee near the company’s headquarters in the fourth quarter. They did well, which prompted Dollar General to accelerate plans to have 30 open by the end of 2021.
Early results for Popshelf “far exceeded our initial expectations for both sales and gross margin,” Todd Vasos, Dollar General’s CEO, told investors on the company’s earnings call Thursday.
Dollar General also plans to “incorporate this concept into a number of our larger format Dollar General locations as we look to capitalize on the significant growth opportunity we see for this differentiated concept,” Vasos said.
In yet another initiative, the retailer plans to roll out a prototype store that has 8,500 square feet of selling space, 1,200 square feet more than its traditional format. It will be one of the base store formats going forward.
An even larger format with 9,500 square feet of selling space will be “deployed opportunistically,” Vasos said.
The company continues to expand on developing its own distribution network to deliver fresh produce and frozen goods to its stores. It started operations in a new warehouse in West Sacramento, California, last fall.
Dollar General also started construction on a warehouse in Ardmore, Oklahoma, which is scheduled to open this spring, and one in Bowling Green, Kentucky, which is set to open this summer.
The company credited the coronavirus pandemic as the primary factor in sales increasing to $33.7 billion last year, up 21.6% from 2019. The retailer brought in new customers who were “trading down” to lower-priced stores, Vasos told investors last year.
But Dollar General closed out the year with a fourth quarter that didn’t dazzle analysts. It reported net sales of $8.4 billion, 17.6% higher than the previous comparable quarter. Same-store sales increased 12.7%.
Earnings per share fell short of Wall Street estimates by 10 cents. Dollar General reported earnings of $2.62 per share, a 24.8% increase from the previous year. Wall Street forecast $2.72 per share.
Nick Shields, senior analyst at Third Bridge Group, said in a note to clients that the performance was solid but disappointing.
“While this quarter comes on the heels of a few solid quarters in a row, it is nonetheless underwhelming news for a company that had expected to reap more pandemic related gains,” Shields said.
Camilla Yanushevsky, senior equity analyst with CFRA Research, knocked Dollar General down from a "strong buy" to "buy," writing in an investor note that the company remains a top pick but is leaning more toward “consumer discretionary segments that we expect to get a lift from the economy reopening.”
Dollar General will “grow stronger given ambitious expansion,” Yanushevsky wrote.