Dollar General Corp. is adding more food to its assortment and snapping up market share, but profit-margin pressure demonstrates the impact the push is having.
Dollar General DG, -7.49% stock closed down 7.5% in Thursday trading after the discount retailer reported fourth-quarter earnings per share of $1.84, below the $1.89 FactSet consensus.
However, sales rose 8.5% to $6.65 billion. And the company introduced two new initiatives: DG Fresh, which has already brought more fresh and frozen foods to about 300 stores, and Fast Track, an effort to improve in-store productivity and convenience to customers.
The spending on those two programs is expected to be $50 million in 2019.
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Todd Vasos, Dollar General’s chief executive, outlined three goals for DG Fresh on the earnings call: reduce product calls, which will give margins a boost; drive up in-stock levels and, therefore, sales; and increase value for customers.
“Today there are many items we cannot cost-effectively procure through our current mode, and in addition, self-distribution will allow us to offer a wider selection of our own private brands to provide our customers with even more compelling value,” Vasos said, according to a FactSet transcript.
“Overall, we expect DG Fresh to allow us to do a better job of tailoring our product selection to fit the needs of our customers, particularly in rural areas.”
Raymond James still rates Dollar General a strong buy, but takes note of the damage to margins.
“Dollar General is not a margin expansion story, as management is continuing to successfully invest in market share,” analysts wrote.
UBS analysts also held on to their “buy” stock rating and $125 price target.
“[W]e believe [Dollar General’s] track record of execution and growth potential should allow it to continue taking share going forward,” analysts said.
Edward Jones rates Dollar General shares “buy” and has them on its Stock Focus List, calling the fundamentals of the dollar-store sector “solid.”
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Analyst Brian Yarbrough also lists three reasons why the company has “attractive store economics”: smaller stores of about 7,500 square feet become cash-flow positive within the first year; the company has a low-cost model that requires few workers and maintenance costs; and the small stores allow the company to go into places with low populations, adding to their convenience versus the competition.
Moreover, the stores aren’t as vulnerable to e-commerce encroachment.
Dollar General stock has gained 3.3% for the year to date, while the S&P 500 index SPX, -0.09% has rallied 12.1% for the period.
