The news: Dollar General spent two years cutting SKUs across every store at once. The next round will target individual stores, even as the chain adds more $1 items across all of them.
“The team is looking at continued SKU rationalization, albeit probably more surgical in nature,” CEO Todd Vasos said on the fiscal second-quarter call.
DG is testing planograms, the layouts that set each store's shelf assortment, with “a substantial amount of SKUs” removed for low-volume stores. It is also rethinking assortment separately in stores where shrink is still a headwind. The tests start in the back half.
The change comes on top of a quarter of growth. Net sales rose 5.2% to $11.29 billion, and same-store sales grew 3.5% on a fifth straight quarter of traffic growth. EPS rose 33% to $2.48, according to the release, about $0.25 of it from one-time tariff refunds.
The broad cuts are done. DG has reduced inventory “to a level we believe is appropriate to support strong sales growth going forward,” CFO Donny Lau said. The chain now expects inventory to grow at a rate below sales.
By the numbers: The surgical phase builds on a reset that is already measurable.
Inventory turned 4.6 times, up from 4.3 a year ago, per the 10-Q. That works out to about six fewer days of inventory across the network.
Per-store inventory fell 2.7%. The total held flat at $6.6 billion across 21,148 stores.
Sales per square foot rose to $273 from $266.
“Shrink is improving at a faster and higher rate than initially anticipated,” Lau said on the call. He expects roughly 50 basis points of additional gross margin help this year, on top of more than 80 in fiscal 2025.
What changed: At the same time, DG is expanding its $1 assortment. “Our dollar SKU count in the back half sets is going to be up 40%,” COO Emily Taylor said.
The rotating $1 Value Valley section grew to more than 600 items from about 500, and its sales rose 16%. Its off-shelf displays are in 9,000 stores, on the way to all of them this year.
The plan removes slow-selling items from stores where sales volume or shrink doesn’t justify them, and adds $1 items chainwide. Those items target a customer Vasos says has changed: households earning over $100K were trading in “sporadically” a year ago and now do it “on a more everyday basis.”
The backdrop: Fuel was the quarter’s main cost pressure. The 10-Q calls fuel costs “significantly higher” and expects them to stay elevated “for an uncertain duration.”
Transportation costs rose while distribution costs fell, and Vasos said productivity gains in both areas have covered the pressure so far.
Customers strain when gas nears $4 a gallon, he said, and now buy less per trip but come more often.
The competition: The tariff refunds were the quarter’s other one-time item, and not only at DG. Three discounters received refunds of tariffs they had already paid under IEEPA, the emergency-powers trade law, and each used the money differently on the same morning.
DG put “a substantial portion” into promotions and lower everyday prices and kept the rest.
Barclays analyst Seth Sigman put the gross-margin benefit at “about $91 million” on the call, roughly 81 basis points.
Burlington is putting 100% of its $55 million refund into lower prices and says the full-year earnings impact will be neutral. Dollar Tree booked $369 million of tariff refunds in its cost of sales, which accounted for $1.31 of its $2.70 quarterly EPS.
What’s next: DG raised full-year guidance to $7.80 to $8.00 in EPS on comps of 2.5% to 2.9%. It expects no refund help in the second half and fuel costs to stay elevated “for the balance of the year.”
The planogram tests run through the back half, and the holiday sets arrive with 40% more dollar SKUs.
