Dollar General’s Extraordinary Results

Himanshu is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Every company has various phases in its existence. There are a number of ups and downs that make the path of success even more interesting. The most wonderful aspect in any business is competition. It makes companies become better and enables customers to get the best products at the best price along with best possible service. Every industry undergoes this challenge, and discount retail is no exception.

Intense competition amongst discount retailers has benefited consumers, as they get the lowest prices for their daily needs. Players such as Family Dollar Stores (NYSE: FDO) and Wal-Mart (NYSE: WMT) have resorted to the marketing strategy of pricing goods for as low as $1, which lures many customers to their stores. In an environment where every penny is spent judiciously by customers, these stores make a lot of difference to their budget.

Another prominent player is Dollar General (NYSE: DG), which has been quite active on all strategic fronts and is making the most out of the current economic situation. Its recent third quarter results highlight its popularity among consumers, making investors pretty delighted that it beat market expectations.

Exploring the Quarter…

A host of factors such as strong promotions, a better product portfolio, and inclusion of better brands led to a jump of 10% in revenue, clocking $3.96 billion. Indeed, it was a solid quarter for Dollar General as it expanded its presence by adding new stores. It also increased its promotional activities, which led to increased footfall in its stores, with higher transaction size on each visit.

The retailer’s consumable items segment was the star performer this time as consumers flocked to stores for products such as perishable items. Demand for such products led to a growth of 11% in the segment and was the key driver for top line growth, since it is the largest segment for Dollar General.

Dollar General’s strategy of remodeling its stores to larger ones seemed to work well as it lured more customers as compared to last year. This is in contrast to what rival Wal-Mart has been doing. Wal-Mart has been shifting to smaller sized stores, which help in easy navigation and lower costs for the retailer.

Key Segment…

Dollar General has been eying the toy segment for quite some time now. It has made a number of efforts to outperform its competitors, such as offering discounts when toys above a certain value are bought. Additionally, it is trying to get a wide range of branded toys onto its shelves in order to provide an increased variety of products.

A very important driver in the segment is price. The discount retailer has kept its price low, adapting to the current economic situation where customers are price sensitive. Given the initiatives taken, the toy segment looks reasonably attractive and has the potential to grow in the future.

The retailer is also on the verge of diversifying into a new product line. It is planning to add cigarettes to its product portfolio. Though this will bring higher revenue, margins might get hurt due to lower margins in the product. Moreover, Dollar General is not the first dollar store to add tobacco products. Even Family Dollar Stores, an arch rival, has already started offering cigarettes. In fact, Family Dollar has been performing quite well, with a higher same store sales growth than Dollar General.

The Bottom Line

However, the retailer might be able to outperform its rival through enhancement of its product portfolio and expansionary moves. Even though the peak holiday season is knocking at the door, Dollar General is cautious about the coming months, which is reflected in its outlook. But its initiatives of increased advertising and lower prices seem to be enticing. Addition of well-known brands will also play a major role. These efforts and an exceptional quarter make me think positively about the company. The retailer seems to have huge potential, and can prove to be an exceptional performer in the long term.

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