Executive Summary / Key Takeaways

• Dollar General is executing a focused "Back to Basics" turnaround, demonstrating tangible operational improvements in store standards, inventory management, shrink reduction, and employee turnover, which are stabilizing the business foundation.
• Despite a challenging macroeconomic backdrop for its core low-income customer, the company is successfully attracting higher-income "trade-in" shoppers seeking value, contributing to positive same-store sales growth and increased basket size in Q1 2025.
• Strategic investments in real estate (Project Renovate and the new Project Elevate remodels, targeted new store growth) and digital initiatives (expanded delivery options, DG Media Network) are designed to enhance the customer experience, drive future sales growth, and improve profitability, building on the stabilized operational base.
• The company provided updated 2025 guidance reflecting Q1 outperformance but tempered by ongoing macro uncertainty and potential tariff impacts, while outlining a long-term financial framework targeting operating margin expansion and double-digit EPS growth starting in 2026.
• Key factors for investors to monitor include the continued progress on shrink reduction, the impact of tariffs on consumer spending and costs, the success of strategic growth initiatives in driving sales mix and market share, and the company's ability to manage its debt levels while investing for the future.

Setting the Scene: America's Neighborhood General Store in Transition

For over 85 years, Dollar General Corporation has served as "America's neighborhood general store," building a vast footprint across the United States, primarily in rural and underserved urban areas. Its core business model revolves around offering a broad selection of everyday essentials and discretionary items at compelling value price points in convenient, small-box locations. This model has historically demonstrated resilience across various economic cycles, catering to a value-conscious customer base, many of whom have low or fixed incomes.

However, recent years have presented significant headwinds, including persistent inflation, shifting consumer spending patterns, and operational challenges that impacted store execution, inventory management, and profitability. This culminated in a period of softer performance in fiscal 2024. In response, under the renewed leadership of CEO Todd Vasos, Dollar General embarked on a strategic pivot dubbed "Back to Basics." This initiative was designed to re-emphasize fundamental retail execution and strengthen the operational foundation of the business, seen as essential for navigating the challenging environment and positioning the company for future growth.

In the competitive landscape, Dollar General stands as the largest discount retailer by store count, but it operates alongside formidable rivals such as Walmart (WMT), Dollar Tree (DLTR), Target (TGT), and warehouse clubs like Costco (COST). While Walmart's scale and growing omnichannel capabilities present broad competition, particularly as it attracts value-seeking shoppers across income levels, Dollar Tree competes more directly on price point and convenience in similar markets. Target offers a more curated, digitally integrated experience, while Costco focuses on bulk value for members. Dollar General's differentiated strength lies in its unparalleled density in rural markets and its focus on a tailored assortment for its core customer, a position the company is now seeking to leverage and enhance through strategic investments and technological advancements.

Strengthening the Foundation: The Impact of "Back to Basics"

The "Back to Basics" initiative, a central focus throughout fiscal 2024 and into the first quarter of 2025, has begun to yield tangible operational improvements. A key area of emphasis has been enhancing the in-store experience. Efforts to improve store standards, increase employee presence at the front end, and sharpen perpetual inventory management have contributed to significant increases in customer satisfaction levels, rising by over 900 basis points since Q1 2024. Concurrently, in-stock levels have improved, increasing approximately 180 basis points from Q3 2020 through Q3 2024, ensuring products are available when customers need them. These improvements are supported by lower year-over-year employee turnover across all levels of retail operations, indicating positive momentum in employee engagement and retention.

Supply chain efficiency has also been a critical component of the turnaround. Dollar General has focused on improving its on-time and in-full (OTIF) truck delivery rates, achieving significantly higher levels in Q3 2024 compared to the prior year (on-time up ~470 bps, in-full up ~900 bps). This enhanced reliability simplifies work in stores and improves on-shelf availability. The company has also optimized its distribution network by exiting 15 temporary warehouse facilities in the last 12 months, with plans to exit three more in 2025, while opening new permanent distribution centers in Arkansas and Colorado. These new facilities incorporate automation, a technology first implemented in the South Carolina DC last year, aimed at increasing efficiency, optimizing storage, and improving inventory accuracy. Furthermore, a full-scale refresh of the DC sorting process, the first since 2017, is nearing completion, designed to enable faster stocking and drive sales growth.

Merchandising efforts under "Back to Basics" have focused on optimizing inventory and simplifying store operations. Total merchandise inventories decreased by 5% in Q1 2025 compared to the prior year, and by 7% on a per-store basis, achieved while simultaneously improving in-stock levels and growing sales. The company is on track to achieve a net reduction of approximately 1,000 SKUs by the end of fiscal 2024, streamlining planograms and improving productivity. Simplifying in-store work includes reducing the number of floor stands, down by approximately 25% in the first half of 2024 with a target of over 50% reduction by year-end, allowing store teams to focus more on customer engagement.

These operational improvements are directly contributing to mitigating key headwinds, particularly shrink and damages. Shrink mitigation efforts resulted in a 61 basis point year-over-year improvement in Q1 2025, building on a 68 basis point improvement in Q4 2024 and a 29 basis point tailwind in Q3 2024. Damages also showed a slight favorable change in Q1 2025. While both are expected to remain elevated in 2025, the progress made supports management's belief that shrink is turning into a tailwind, expected to become more material in 2025.

Strategic Growth Initiatives & Leveraging Technology

Building on the stabilized foundation, Dollar General is actively pursuing strategic initiatives aimed at driving future growth and enhancing its value and convenience proposition. A key area of focus is leveraging technology to complement its extensive physical footprint.

The company's digital initiative includes its mobile app and website, serving as platforms for customer engagement. A highly successful partnership with DoorDash (DASH) provides incremental delivery services from over 16,000 stores, now including SNAP and EBT transaction processing. Expanding on this, Dollar General is significantly rolling out its own same-day home delivery offering through its DG app and website, currently available in over 3,000 stores with a goal to reach up to 10,000 by the end of 2025. This leverages the company's dense real estate network to potentially offer the fastest delivery option in many communities, driving higher average baskets and customer loyalty.

The linchpin of the digital strategy is the DG Media Network, a platform connecting brand partners with Dollar General customers. This network grew retail media volume by over 25% in Q1 2025 year-over-year. It enables a more personalized customer experience and delivers a higher return on ad spend for partners. The expansion of the company's own delivery offering is expected to accelerate the scaling of the DG Media Network, creating a potential margin tailwind and further evolving customer relationships. Beyond customer-facing technology, investments in automated DC systems and a new ERP system (over the next couple of years) aim to drive operational efficiency.

Real estate development remains a core growth driver. In 2025, Dollar General plans approximately 4,885 projects, including 575 new stores in the U.S. (plus up to 15 in Mexico), 2,000 Project Renovate remodels, 2,250 Project Elevate remodels, and 45 relocations. New stores, predominantly in larger 8500 sq ft formats, allow for expanded offerings like incremental coolers, a larger health and beauty section, and produce in select locations (adding produce to ~300 new stores in 2025, targeting ~7,000 total by year-end). While new store returns are targeted at a still strong 17% average in 2025, slightly down from historic levels due to higher costs, the company sees significant runway for new unit growth.

Remodels are being accelerated to impact approximately 20% of the store base annually. Project Renovate (full remodels) targets 6-8% first-year comp lifts, while the new Project Elevate (incremental remodels in mature stores not yet in the full remodel pipeline) targets 3-5% first-year comp lifts with a lower investment. Project Elevate focuses on merchandising optimization and physical refreshes in prominent areas, aiming to enhance the shopping experience and mitigate future repairs and maintenance costs. The recent portfolio optimization review led to the closure of 96 Dollar General stores and 45 pOpshelf stores, and the conversion of 6 pOpshelf stores to the Dollar General banner, optimizing resource allocation and focusing on the most productive locations. No new pOpshelf stores are planned for 2025 due to the softer discretionary environment, with efforts focused on improving the performance of the remaining 180 standalone stores and leveraging pOpshelf learnings for Dollar General's non-consumable categories.

The non-consumable growth strategy is critical for improving the sales mix and enhancing margins. The goal is to increase the non-consumable mix by at least 100 basis points by the end of 2027, ultimately moving closer to 20% of total sales over the next five years. This strategy is built on four pillars: brand partnerships, a revamped treasure hunt experience, reallocation of space within the home category, and increasing productivity and newness in core and non-core space. The company also continues to invest in its $1 price point strategy, offering over 2,000 items at or below $1, often utilizing smaller pack sizes to meet customer affordability needs.

Financial Performance and Outlook

Dollar General's financial performance in the first quarter of 2025 demonstrated positive momentum, exceeding internal expectations. Net sales increased 5.3% to $10.44 billion, driven by new store contributions and a 2.4% increase in same-store sales. The comp increase was fueled by a 2.7% rise in average transaction amount (higher prices and items per transaction), partially offset by a slight 0.3% decrease in customer traffic. All product categories saw positive comp sales, with seasonal and home products performing particularly well.

Gross profit as a percentage of sales improved by 78 basis points to 31%, primarily benefiting from lower shrink and higher inventory markups, despite increased markdowns. SG&A expenses increased by 77 basis points to 25.4% of sales, mainly due to higher retail labor, incentive compensation, and repairs and maintenance. Operating profit grew 5.5% to $576 million, maintaining a relatively flat operating margin of 5.5%. Net income increased 7.9% to $391.9 million, resulting in diluted EPS of $1.78, a 7.9% increase year-over-year.

The company's liquidity position remains solid. Cash and cash equivalents stood at $850 million at the end of Q1 2025. Cash flows from operations were strong at $847 million in Q1 2025, up 27.6%, driven by improved sales and inventory management. Dollar General maintains access to a $2.38 billion Revolving Facility and a $2.0 billion commercial paper program, with ample borrowing availability.

The company is focused on improving its leverage ratio, targeting below 3x adjusted debt to adjusted EBITDAR (using balance sheet lease liabilities), to support its investment-grade credit ratings (Moody's Baa3 Stable, S&P BBB Negative). Capital expenditures are projected at $1.3 billion to $1.4 billion for 2025, prioritizing investments in the business. The quarterly cash dividend of $0.59 per share is maintained, but share repurchases are paused in 2025 to preserve financial flexibility and support the credit rating.

Looking ahead, Dollar General updated its financial guidance for 2025 to reflect the Q1 outperformance while acknowledging heightened uncertainty, particularly regarding tariffs. The company now expects net sales growth of approximately 3.7% to 4.7%, same-store sales growth of approximately 1.5% to 2.5%, and EPS in the range of $5.20 to $5.80. This guidance assumes current tariff rates through mid-August 2025 and planned mitigation efforts, but allows for potential incremental pressure on consumer spending. SG&A is expected to be pressured in Q2 2025 by a significant increase in incentive compensation expense, leading to an anticipated year-over-year EPS decline in the quarter. Full-year headwinds include $180 million to $200 million in incentive compensation and 3.5% to 4% wage rate increases.

The company also outlined a long-term financial framework targeting annual net sales growth of 3.5% to 4% (including ~2% unit growth) starting in 2025, annual same-store sales growth of 2% to 3% beginning in 2026, and operating margin expansion starting in 2026, aiming for 6% to 7% as early as 2028. This framework anticipates annual adjusted EPS growth of at least 10% starting in 2026, supported by margin catalysts like shrink/damage reduction and strategic initiatives, alongside SG&A efficiencies.

Competitive Landscape and Positioning

Dollar General operates in a fiercely competitive retail environment, vying for the value-conscious consumer against a range of players from mass merchandisers to other dollar stores and drug retailers. While Walmart represents the most significant competitor due to its sheer scale, broad assortment, and increasing focus on value and convenience across formats and digital channels, Dollar General maintains a differentiated position through its extensive network of small stores deeply embedded in rural communities. This density provides a convenience moat, often placing a Dollar General store closer to customers than larger format competitors.

Compared to Walmart, Dollar General's gross margins (31% in Q1 2025) are typically higher than Walmart's (~24%), reflecting a different product mix and operational focus, although Walmart's scale often translates to lower operating costs per unit overall. Dollar General's "Back to Basics" efforts and strategic initiatives like supply chain automation and inventory optimization are aimed at enhancing its cost structure and operational efficiency to better compete.

Dollar Tree, another key competitor, operates with a fixed-price model (primarily $1.25), which differs from Dollar General's multi-price point strategy. While Dollar Tree has pursued growth through acquisitions like Family Dollar and is expanding its multi-price point offerings, Dollar General's broader price range allows for greater product variety and flexibility in merchandising. Recent competitor store closures, particularly in the drug store space (like CVS (CVS) and Walgreens (WBA)) and potentially from Family Dollar's portfolio optimization, are seen by Dollar General as opportunities to capture incremental market share, especially as drug stores have historically been significant share donors in consumables.

Target competes more on a blend of value, style, and convenience, with a stronger digital presence and appeal to a broader income demographic. Costco focuses on bulk purchases and a membership model, catering to a different shopping mission. Dollar General's strategic response to these competitors includes leveraging its physical footprint for rapid delivery options (via DoorDash and its own app), enhancing its digital capabilities (DG Media Network), and improving the in-store experience through remodels to attract and retain a wider range of customers, including the observed increase in middle- and higher-income "trade-in" shoppers. The focus on the non-consumable growth strategy is also key to improving the sales mix and competing more effectively in higher-margin categories where Target and other retailers have traditionally been strong.

Dollar General's technological investments, particularly in its digital platforms and supply chain automation, are crucial for building a competitive moat against rivals with more established e-commerce operations and sophisticated logistics. The ability to offer fast, local delivery from its vast store network is a direct attempt to counter the convenience offered by online giants and mass retailers in the digital space, particularly in rural areas where such services may be limited. The DG Media Network represents an emerging technological advantage, creating a new revenue stream and enhancing targeted marketing capabilities, which can strengthen relationships with both customers and brand partners.

Risks and Challenges

Despite the operational improvements and strategic initiatives underway, Dollar General faces several significant risks and challenges that could impact its performance and the achievement of its long-term goals. The primary headwind remains the financial constraint on its core low-income customer base, exacerbated by ongoing inflation and potentially impacted by factors like the reinstatement of defaulted student loan collections. This pressure can limit discretionary spending and influence purchasing decisions, potentially impacting sales mix and profitability.

The dynamic and uncertain tariff environment poses a risk to both the cost of goods sold and consumer spending. While Dollar General has mitigation strategies in place and expects to absorb a significant portion of the impact, broad price increases across retail could further pressure already strained consumers. Increases in labor costs, particularly retail wage rates, and other operating expenses like repairs and maintenance, utilities, and depreciation, continue to pressure SG&A and operating margins.

Inventory shrink and damages, while showing signs of improvement, remain elevated and require sustained focus and investment. Legal proceedings, including shareholder lawsuits, introduce uncertainty and potential financial risk. The company's debt levels, while being actively managed, remain above its target leverage ratio, and maintaining investment-grade credit ratings is crucial for financial flexibility.

The success of strategic initiatives, such as the ambitious real estate project pipeline (especially the new Project Elevate remodels), the expansion of the digital delivery offering, and the non-consumable growth strategy, is not guaranteed and requires effective execution. Failure to achieve the targeted sales lifts or cost efficiencies from these initiatives could impact future growth and profitability. Furthermore, intense competition from well-resourced rivals, particularly in the digital space and as they also focus on value, could limit market share gains and pressure pricing.

Conclusion

Dollar General is in a period of focused transformation, leveraging its "Back to Basics" operational improvements to stabilize the business and build a foundation for future growth. The company's first-quarter 2025 results demonstrate positive momentum, driven by improved execution and strategic initiatives that are beginning to resonate with a broader customer base, including value-seeking higher-income shoppers.

While the macroeconomic environment and competitive pressures present ongoing challenges, particularly for the core consumer and in managing costs, Dollar General is strategically investing in its physical store base through accelerated remodels and targeted new unit growth, while simultaneously expanding its digital capabilities through enhanced delivery options and the DG Media Network. These initiatives, coupled with a focus on improving the sales mix through non-consumable growth and continued efforts to mitigate shrink and damages, are central to the company's strategy to drive operating margin expansion and achieve its long-term financial targets, including double-digit EPS growth starting in 2026. The ability to successfully execute on these initiatives, navigate external headwinds like tariffs, and effectively leverage its unique market position and technological advancements will be key determinants of Dollar General's success in creating long-term shareholder value.