Dollar General, Don't Repeat Walmart's Mistakes
More than 13,000 stores later, Dollar General Corp. is having its own Walmart moment.
The dollar-store chain on Thursday posted its first year-over-year quarterly sales decline since its 2009 IPO. At the same time, it reiterated plans to open 900 new stores this year and 1,000 new stores in 2017.
But its sales drop should be a warning sign that this push to open more stores is yielding diminishing returns. Shares fell as low as 9 percent on Thursday.
Come on, Dollar General, we've seen this story before. Let's remember how Wal-Mart Stores Inc. kept building stores around the country, only to see its same-store-sales growth falter. Only in the past year or two has Walmart realized that just building more gigantic supercenters isn't the answer to long-term growth and cut back on new-store openings.
Dollar General should learn from Walmart's mistakes. There's already been major consolidation in the dollar-store space, after Dollar Tree and Family Dollar merged last year. The industry has matured and competition is rising: German discounters Aldi and Lidl have made clear their intentions to expand in the U.S.
And a discount push at Walmart has led to rumblings of a price war that will no doubt hurt Dollar General.
The macro picture doesn't look great for the dollar store, either.
For one thing, the percentage of people on food stamps -- who help fill the dollar store's coffers -- is down 9 percent from its 2012 high. If President-Elect Donald Trump cuts back on such government assistance, then this could decline further.
Falling prices also continue to lower the overall dollar amount taken in by dollar stores, grocers, and mass merchants. That makes it harder to generate more sales, even if the volume of goods sold increases. Dollar General said Thursday that deflation and the reduction of food assistance negatively impacted third-quarter comparable sales by 150 to 175 basis points.
The thing is, Dollar General has the ability to turn this sales decline into a small blip in its corporate history.
The company remains a massive force in the retail industry, and it has the chops to take on Walmart, as well as the incoming invasion of German discounters. It can focus on growing market share through lower prices, continuing to add more fresh food and consumables to its product mix, and growing more profitably through better store productivity.
If Dollar General keeps up its current fast pace of new store openings, then its EPS could be roughly 25 percent lower in 2022, while a slower new-store strategy could achieve roughly the same overall level of sales more profitably, according to Jefferies analyst Daniel Binder.
The company just has to stop operating on the old-school retail mantra of "if we build it, customers will come." Otherwise, it will run into the same problems -- over-saturation and new stores cannibalizing the sales of old ones -- that contributed to one of Walmart's worst U.S. sales droughts in its history. Dollar General doesn't have to repeat that.
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