DG has formula for growth, but 2017 will be tough
Dollar General is charging head with unprecedented expansion plans and paying store managers more while it hunts for a new head merchant to revitalize sales growth.
Some big changes could be in store at Dollar General where a search is underway for a new chief merchandising officer to improve the productivity of an expansive network of 13,320 stores planned to grow by 1,000 units this year. Dollar General president and CEO Todd Vasos, who previously served as head merchant, said the company is considering internal and external candidates for the key role being vacated on April 15 by James W. Thorpe.
Thorpe is retiring from Dollar General for the second time so the move is not a complete surprise. He first left the company in July 2012 while serving as an SVP of merchandising when the organization was led by Vasos. When Vasos was elevated to the role of COO in November 2013, the company named David D’Arezzo head merchant. Vasos became President and CEO in June 2015 and two months later lured Thorpe out of retirement to replace D’Arezzo who left the company.
“When Jim (Thorpe) rejoined the company in 2015, we agreed upon a clear set of objectives for his tenure as CMO,” Vasos said. “As I knew he would, Jim has delivered on the merchandising strategies we identified as our highest priorities. I’m grateful for his contributions and wish Jim and his family the best in the future.”
Whomever fills Thorpe’s role will become the fourth executive to lead the merchant group in as many years and will face challenge of reversing deteriorating same store sales in a market where competition is not getting any easier and expense pressures are mounting.
Total sales in the fourth quarter ended Feb. 3 increased 13.6 percent to slightly more than $6 billion, but that figure was inflated by inclusion of an additional week in the reporting period that added roughly $400 million in volume. Same store sales grew a modest 1 percent and excluding the additional week total sales advanced 6.1 percent. The company’s growth was driven primarily by the addition of 900 stores throughout 2016 as full year same store grew a modest 0.9 percent. It is a trend evident in prior years as well with expansion the primary driver of sales growth. Same store sales increased 2.2 percent in 2015, 2.8 percent in 2014 and 1.3 percent in 2013.
“We are pleased with our fourth quarter 2016 financial results, and believe that during the quarter many of our initiatives continued to gain traction,” Vasos said, noting that the company managed through a challenging retail environment. “Dollar General is well-positioned to serve our customers with value and convenience given our plans to open approximately 1,000 new stores in 2017. To strengthen our position for the long term, we are making significant investments, primarily in compensation and training for our store managers given the critical role this position plays in our customer experience, as well as strategic initiatives. While these investments are expected to put pressure on our 2017 earnings, we believe they will strengthen our market share position over time and are positive steps to further support sustainable growth for our shareholders over the long term.”
One of the biggest pressures will come from increasing store manager compensation and training initiatives. The company expects those efforts to account for 16 cents of a total 34 cent a share negative impact to earnings this year. Dollar General also expects a nine cent a share negative impact as it laps a 53 week year and a big reduction is share repurchase activity will contribute to another 9 cent reduction. About $450 million will be spent buying back stock this year, compared to last year when the company spent nearly a billion repurchasing 12.4 million shares.
Sales in the coming year are forecast to grow between four and six percent with same store sales projected to increase as much as two percent. Profits are forecast in the range of $4.25 to $4.50 compared to earnings per share of $4.43 for 2016.
While Dollar General has offered a restrained sales and profit outlook, the company remains full speed ahead when it comes to expanding its store and supply chain network. The company plans to open approximately 1,000 new stores and relocate or remodel 900 stores in 2017, compared to the 900 stores opened and 906 stores remodeled or relocated last year.
As a result, at some point in 2017 Dollar General will open its 14,000th store. With such as expansive footprint, the company is also adding supply chain capacity. It recently opened its 14th distribution center in Janesville, Wis., is under construction on a facility in Jackson, Ga., and has announced plans for a 16th facility in Amsterdam, N.Y.