Dollar General 'Excited' About Tobacco Traffic

Selling 33% more than anticipated; full rollout expected in fiscal second half

Greg Lindenberg, Editor, CSP

GOODLETTSVILLE, Tenn. -- Rick Dreiling, chairman and CEO of Dollar General Corp.--which announced plans in December to roll out tobacco at most of its more than 10,500 discount stores in 40 states by the end of second-quarter 2013--said during its fourth-quarter 2012 conference call on Tuesday that test stores are selling "33% more" tobacco than they thought they would sell.

"We are excited with what we're seeing in regards to traffic," he said.

Dreiling also said that one-third of the cigarette transactions are "cigarettes only, which we look at as that person coming in and exploring us for the first time and seeing the store. Other than that, the basket is definitely higher. There's no doubt about that. It's not as high as the basket plus the cigarettes, and we're still working on that. But what we are seeing is a nice [comparable-store sales] increase and more importantly, a nice increase in [tobacco] traffic."

The chain's began initial tobacco tests in Nevada stores in 2011 and Florida stores in 2012. Dollar General said it expects the rollout of tobacco products to substantially all stores in the second half of its fiscal year.

"We anticipate having the rollout sometime between the very end of April and first part of June," said Dreiling.

The company has a deal with Edina, Minn.-based wholesaler Nash Finch Co. "that's focused solely on the movement of cigarettes," he added.

"And most of the time, when you enter into a third-party agreement with that kind of an item, the fact that it's low growth for you, it's also low growth for the provider. And they want candy or HBA items to go with it to make it more valuable to them to do business with you. The exciting thing about it is the merchants here not only negotiated that deal, they negotiated a deal with FedEx to move the products through the system. And the combination of those two items has made it very beneficial for us to be in the cigarette business," he said.

For its fiscal 2012 fourth quarter ended Feb. 1, 2013, the company said sales increased 0.5% to $4.21 billion, compared to $4.19 billion in the 2011 fourth quarter. Gross profit, as a percentage of sales, was 32.5% in the 2012 fourth quarter compared to 32.2% in the 2011 quarter. Operating profit was $522 million, or 12.4% of sales, in the 2012 fourth quarter, compared to $508 million, or 12.1% of sales, in the 2011 fourth quarter. Net income for the 2012 fourth quarter was $317 million, compared to net income of $293 million in the 2011 fourth quarter.

Full year 2012 net sales increased 8.2% to $16.02 billion, compared to net sales of $14.81 billion in 2011. Gross profit rate was 31.7% of sales in 2012 and 2011. Full-year operating profit increased by 11% to $1.66 billion, or 10.3% of sales, in 2012 compared to $1.49 billion, or 10.1% of sales, in 2011. The company reported net income of $953 million for fiscal year 2012, compared to net income of $767 million for fiscal year 2011.

"Given the rollout of tobacco, we expect contraction of our gross margin rate throughout the course of the year. Excluding the impact from tobacco, we would expect that our underlying gross margin rate would actually expand slightly in 2013. At the same time, we expect that our gross margin in the first quarter of 2013 will contact at a greater rate than the rest of the year. The expected first quarter contraction is attributable to anticipated higher inventory strength, higher markdowns and lower incoming markups, which are due mainly to the overall anticipated sales mix and the rollout of tobacco. The rate of gross margin contraction is expected to moderate as we move through the year," Dreiling said on the call.

"Dollar General had yet another outstanding year in 2012 including exceptionally strong fourth-quarter results," he said. "We grew our market share and invested strategically to continue to win with our customers. These results demonstrate the strength of our business strategy, and we believe we are very well-positioned for future growth."

During 2012, the company opened 625 new stores and remodeled or relocated 592 stores. It plans to open approximately 635 new stores, including approximately 20 Dollar General Market stores and 40 Dollar General Plus stores. It also plans to remodel or relocate a total of approximately 550 stores. It expects square footage to increase by approximately 7%.

Goodlettsville, Tenn.-based Dollar General offers products that are frequently used and replenished, such as food, snacks, health and beauty aids, cleaning supplies, basic apparel, housewares and seasonal items at low everyday prices in convenient neighborhood locations.