The ability of Dollar General (DG, Financial) to adapt to a changing operating environment could be the difference between success and failure for the budget retailer.
Under its current strategy, the company is seeking to become more efficient, while offering its customers a greater range and choice of products. Innovation is a central theme for the business, and this could help it to overcome heightened competition in the budget retail segment, as well as a changing economic outlook.
In the last year, the Dollar General stock price has risen 42%. That compares favorably to the S&P 500’s capital growth of 16% in the same time period. The successful delivery of its current strategy could lead to further outperformance versus the wider index.
Food offering
A catalyst on the Dollar General stock price could be its focus on delivering a broader food offering. The company is seeking to compete more effectively with grocery stores by remodelling stores that have fewer than 12 cooler doors. It has found that store remodels usually improve returns over the long run through a higher average basket size and increased customer visits.
The company is set to install around 20,000 cooler doors across its store estate in the current fiscal year. This is forecast to double the average number of cooler doors per store from 10 to 20. Further investment in this area could be ahead over the long run if the current strategy proves to be successful.
Changing business
Improving margins remains a key goal for the company. It is aiming to achieve this through a variety of strategies, with a main focus being on reducing inventory shrinkage. It recently reported its seventh successive quarter of improvement in the shrink rate, with defensive merchandising tactics, the utilization of technology and expanding article surveillance contributing to its success in this area.
An expansion of the company’s private fleet to 200 tractors from 80 tractors by the end of the fiscal year could also boost margins and reduce the impact of future carrier rate fluctuations, which could lead to a more resilient financial performance. The construction of new distribution centers may also help to make the business more efficient. Their full impact is not due to be felt until the 2019 fiscal year, set to contribute positively to stem miles over the medium term.
A focus on impulse purchases is another strategy that could catalyze the company’s top line. It has added the enhanced queue line to over 400 existing stores in the most recent quarter, which has brought the total for the business to 6,800 stores. This comes at a time when the company is seeking to increase the proportion of higher-value items that it sells, as well as offering a mix of limited-availability items. The effect of this strategy is expected to be an increased visit frequency, while also expanding the average customer basket size.
Improving economy
With the U.S. economy growing by 4.2% in the second quarter, consumer spending habits could be in the process of changing. In the years following the financial crisis, dollar stores such as Dollar General increased in popularity as consumers became increasingly price-conscious. Household disposable incomes were under pressure, and a lower price point for everyday items meant that a range of shoppers traded down to dollar stores. This process could now be reversed to some extent, as consumer confidence and household spending levels are forecast to increase.
Alongside this, major retailers such as Walmart are utilizing part of the proceeds from the recent tax cuts to invest in pricing. This could bring them into closer competition with dollar stores. The growth plans of new entrants such as Aldi and Lidl may also dilute the growth potential of budget retailers, with the marketplace set to become increasingly crowded.
Outlook
In response to these threats, Dollar General is focusing on innovation. It is set to invest in a higher-margin private-label program that currently includes around 40 unique private brand product lines. It is also seeking to sell a wide range of healthier food options, as it seeks to capitalize on growing demand for clean-ingredient packaged foods. It will also rebrand a range of its beauty products as it seeks to widen its demographic appeal to include millennials.
Additionally, the company is investing in its digital offering. It is seeking to deploy innovative technology across its stores in order to enhance the customer experience. One example of this is a new app that allows customers to scan items as they shop, alerting customers to potential savings on the items they are purchasing. Feedback has thus far been positive regarding the app, with it increasing basket size and encouraging more frequent visits by customers who regularly engage with it.
Investment potential
Although an improved outlook for the economy and increasing competition are threats to the Dollar General stock price, its focus on innovation and efficiency could lead to stock price growth. Increased investment in its food offering and measures being taken to boost margins could act as further catalysts on its financial performance. Therefore, after a successful year for its investors, it seems to have long-term investment appeal.
