Shrink down, margins up at Dollar General a year after removing nearly all self-checkout

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2 days ago

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A year after its move to take out most of its self-checkout, Dollar General reported that lower shrink and higher inventory markup were major factors in boosting Q1 gross margin by 78 basis points to 31%. Net income rose nearly 8% to $392 million.
Net sales in the period rose 5.3% year over year to $10.4 billion. Despite a 0.3% traffic decline, comps rose 2.4%, thanks to a 2.7% bump in average transaction amount, the discounter said Tuesday.
In Q1, Dollar General opened 156 stores, remodeled 668 as part of Project Elevate and 559 as part of Project Renovate. The company, which as of May 2 runs more than 20,000 locations, aims to overhaul 20% of its fleet each year, CEO Todd Vasos told analysts Tuesday. Plans for 2025 include opening about 575 stores in the U.S. and up to 15 in Mexico and remodeling about 4,250.
Not long ago, shrink was an obsession of major retail industry groups and some major chains, though visibility into the issue has decreased since the National Retail Federation stopped publishing its shrink report. A year ago Vasos called shrink 'the most significant headwind in our business.'
But on Tuesday, Dollar General Chief Financial Officer Kelly Dilts told analysts that improvement in shrink rates will be a tailwind throughout the year and that 'should be the gift that just keeps on giving here.'
'As we think about gross margin, we are just really pleased with where shrink came in,' she said.
Major changes to Dollar General stores have entailed not just pulling self-checkout kiosks from stores but also improving layout, merchandising and staffing.
'Our store standards are much, much better than they've been in quite a long time, and every single quarter that goes by continues to get better and better,' Vasos said Tuesday.
That is backed up by GlobalData channel checks, which found that fewer Dollar General locations suffer from inferior standards. 'While there are still some issues like cages and boxes cluttering up aisles, Dollar General seems to have minimized this issue with better scheduling and a modest investment in labor,' GlobalData Managing Director Neil Saunders said in emailed comments.
Tariffs and the economy are likely to be the big challenges looming over Dollar General's performance, according to Saunders.
Direct imports are 'a relatively small percentage' of Dollar General's business and tend to be in the mid- to high-single digit range of its overall purchases, with indirect imports varying, Vasos said. The company has diversified its supply chain — reducing its direct imports from China to less than 70% and indirect imports from China to less than 40% — and worked with vendors to share costs and found substitute merchandise where possible.
However, raising some prices may be inevitable.
'While the tariff landscape remains dynamic and uncertain, we expect tariffs to result in some price increases as a last resort, though we intend to work to minimize them as much as possible,' Vasos said. 'In turn, we believe our customers will continue to seek opportunities to save money, and we remain committed to serving them with the everyday low prices they have come to know and appreciate from Dollar General.'