I participated in Dollar General's conference call last week ($DG (+2,9%) ) on their fourth quarter 2024 results last week. I would like to summarize my insights here:
Todd Vasos, CEO , was pleased with the fourth quarter performance, which was characterized by solid execution and good sales numbers. He emphasized that the "Back to Basics" initiative showed positive results and that the company is well positioned for 2025. An important milestone was that Dollar General achieved annual sales of over USD 40 billion in the 2024 financial year for the first time in the company's history. annual turnover of over 40 billion US dollars has achieved. This underscores Dollar General's significant role as a local supplier in over 20,000 communities. In the fourth quarter, Dollar General increased its increased its market share in both consumer and non-consumables.
The same-store sales increased by 1.2 %driven by growth in the average transaction amount of 2.3 %. This was partially offset by a 1.1% decline in customer traffic due to continued financial pressure from core customers and the strong prior year comparison. The increase in comparable sales was exclusively attributable to the consumer goods category, while the seasonal items, household goods and clothing segments recorded declines.
Vasos also addressed the financial situation of customers, which it said had deteriorated over the past year. Many customers only have money for the bare essentials and even have to save on necessities5 . No improvement in the macroeconomic environment is expected for 2025, especially not for core customers. The focus will therefore remain on offering value and convenience. With regard to the announced tariffs, Vasos was confident that the impact could be mitigated in 2025.
An important point was the announced portfolio optimization. A review of Dollar General and pOpshelf's real estate portfolio was carried out in the fourth quarter. As a result 96 Dollar General stores were selected for closure mainly in urban locations that were increasingly difficult to operate. At pOpshelf were 51 stores were identified as candidates for closure of which 6 will be converted into Dollar General Stores and the remaining 45 will be closed. After these measures, there will still be 180 pOpshelf stores. In the fourth quarter, these decisions led to a negative negative impact on operating profit of 232 million US dollars in the fourth quarter..
Vasos was optimistic about the future of pOpshelf and referred to positive customer feedback. Various initiatives are planned to increase sales, including new brand partnerships, an improved in-store experience and new categories. A new store layout with a focus on toys, party goods, sweets and beauty products is showing initial success. Insights from pOpshelf will also be used to strengthen the non-consumable offering in Dollar General stores.
The presentation was followed by questions from analysts.
Kate McShane from Goldman Sachs asked about the expected course of margin expansion until 2028 and the biggest structural changes that will prevent a return to historical operating margins. Kelly Dilts explained that it would not be a linear increase, but that many measures were being taken to achieve the targets. Key drivers are the improvements in inventory differences and losseswhich are already showing positive developments. Initiatives such as the DG Media Network and an improved non-consumable strategy would also help to improve margins.
Simeon Gutman from Morgan Stanley asked about the current situation of the consumer, in particular about changes in recent months. Todd Vasos described the situation as still tense for the core customers, but he is observing an increasing "trade-down" tendency among both mid-range and high-end customers. This trend intensified in the fourth quarter and appears to have continued in the first quarter.
Zhihan Ma from Bernstein asked whether more closures are to be expected after the announced closures and how the returns from new store openings compare to Project Elevate and traditional remodels in the long term. Todd Vasos explained that the portfolio review had been thorough and the closures were strategic decisions. He continues to see potential for new stores in the USA and Mexico. Positive contributions are also expected from Project Elevate (expected sales increase of 3 % to 5 %) and traditional Remodels (6 % to 8 %).
Rupesh Parikh from Oppenheimer inquired about the current status of the stores (inventory, staffing) and the possibilities for further improving working capital. Todd Vasos was satisfied with the condition of the stores, which had improved thanks to the "Back to Basics" initiative. Inventories are at a high level and there is still potential for optimization. Kelly Dilts emphasized the successful reduction of inventory while at the same time increasing availability, which has had a positive effect on working capital. She announced further debt reductions for 2025.
Seth Sigman from Barclays noted that the sum of the margin drivers mentioned would exceed the long-term margin target of 6 % to 7 % and asked about possible compensation effects or whether the targets were conservative. Todd Vasos emphasized that the long-term framework strikes the right balance in order to do justice to customers, employees and shareholders. They are always striving to achieve more and the target should be seen as a good anchor point.
Robby Ohmes from Bank of America concluded by asking about estimates of the competitive environment in 2025 compared to 2024, particularly in relation to Walmart, the expansion of delivery services and the closure of competitors. Todd Vasos emphasized that competition is always present, but he sees opportunities through the closure of competitors such as Party City and the continued market share gains against drugstores. The accelerated "trade-down" movement is playing into Dollar General's hands. The expansion of the delivery service should be a competitive advantage, especially in rural areas. The DG Media Network is an important building block for the digital strategy and offers margin potential.
The conference call gave the impression of a company that has taken the right steps to strengthen its base after a challenging 2024. The strategic portfolio optimization through the closure of unprofitable stores is a logical step. The financial guidance for 2025 is moderate, but takes into account the ongoing challenges for core customers and higher investments in the first half of the year. The long-term financial framework with ambitious targets for sales and margin growth as well as the resumption of share buybacks from 2027 signals confidence for the future.
Overall, Dollar General appears to be well positioned to benefit from the current economic situation and changing consumer habits, even if headwinds are still expected in the short term.
I personally have Action (via 3i Group $III (+1,85%) ), a European counterpart in the portfolio.
