Dollar General's stock gives up gains after CEO says he's not happy with company's performance

By Ciara Linnane

CEO outlines a 'back-to-basics' plan that aims to get products on shelves more quickly and add staff to checkout areas

Dollar General Corp.'s stock fell 1.8% Thursday after the discount retailer beat third-quarter earnings estimates and backed its guidance for the full year but its recently reinstalled chief executive said he was not happy with the company's performance.

The Goodlettsville, Tenn.-based company (DG) posted net income of $276.2 million, or $1.26 a share, for the third quarter, down from $526.2 million, or $2.33 a share, in the year-earlier period. Sales rose 2.4% to $9.694 billion from $9.465 billion a year ago.

The FactSet consensus was for earnings per share of $1.20 and sales of $9.644 billion.

Same-store sales fell 1.3%, while FactSet was expecting a 2.1% decline.

"While we are not satisfied with our financial results for the third quarter, including a significant headwind from inventory shrink, we are pleased with the momentum in some of the underlying sales trends, including positive customer traffic, as well as market share gains in both dollars and units," CEO Todd Vasos said in a statement.

Vasos returned to the role of CEO in October. He previously held the position from June 2015 to November 2022.

Read now: Dollar Tree is attracting more high-income shoppers

Inventory shrink, which refers to items lost through damage or shoplifting, has become a common theme in retail earnings this year, with some companies claiming organized gangs are targeting them and causing billions of dollars in losses.

For more, see: Retail 'shrink' is about much more than theft, analysts say

Related: Retailers talk a lot about rising theft. But a retail-industry report finds a key metric hasn't increased much.

Vasos said Dollar General has completed a review of all aspects of the business and is now planning a "back-to-basics" revamp. For fiscal 2024, it is planning about 2,385 real-estate projects, including 800 new stores, 1,500 remodels and 85 relocations.

"This is a modest slowdown compared to the number of projects in recent years, which we believe is prudent in this environment," he said.

On a call with analysts, Vasos outlined plans to increase staffing in the front of stores, particularly at the checkout area, which he said should help with shrink. Shrink is a roughly 100-basis-point headwind for Dollar General and was running slightly above that heading into the quarter, he said.

The company is also reallocating labor investments toward store-level inventory-management processes, with a greater focus on getting product to shelves more quickly.

"We are also reducing the span of control for our district managers, which will provide more opportunity for engagement with our store managers and their teams, and more consistency and execution across the store base," he said, according to a FactSet transcript.

The move is expected to improve retention rates at the store-manager level, where turnover is "currently higher than we like," he added.

In the supply chain, Dollar General is pushing for truck deliveries to be on time and full, a metric known as OTIF. The company will better optimize inventory at its distribution centers and rationalize its SKUs, or stock-keeping units. It will also reduce the number of temporary outside warehouse facilities in use, which should also speed up getting product to shelves.

The company plans to open more stores in rural areas and will prioritize larger-store formats, which are more profitable. It's aiming to restore margins to prepandemic levels of above 7%.

Sales in the quarter fell in all four product categories of home, seasonal, apparel and consumer. But customer traffic turned positive in the middle of the quarter and improved after that.

A recent survey found Dollar General's customer is still feeling "significant" pressure on spending, Vasos said.

"Based on these trends and what we see in the macroeconomic environment, we anticipate customer spending may continue to be constrained as we head into 2024, especially in discretionary categories," he said.

Jefferies analysts reiterated their buy rating on the stock after the numbers were reported.

"Expectations were low coming into the print, as the company lowered its guidance mid-quarter," analysts led by Corey Tarlowe said in a note. 'Within the quarter, we are encouraged by positive traffic trends and market share gains in dollars and units."

Dollar General backed its full-year guidance for a sales increase of 1.5% to 2.5% and for EPS of $7.10 to $7.60. The company expects same-store sales to be down 1% to flat.

The stock is down 47% in the year to date, while the S&P 500 SPX has gained 19%.

Now read: A record number of customers shopped during Thanksgiving weekend - but spent less on holiday items

-Ciara Linnane

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

12-07-23 1134ET

Copyright (c) 2023 Dow Jones & Company, Inc.