GOODLETTSVILLE, Tenn. — Dollar General Corp. here said Tuesday it plans to adjust the mix of national to private brands to boost its gross margins.
Gross profit margins fell 89 basis points to 30.6% of sales for the first quarter ended May 3, following a strong uptick in lower-margin consumables and a big decline in higher-margin discretionary categories.
Analysts said the declines in gross margin have not discouraged their positive view of Dollar General.
“The company had expected to experience the greatest gross margin pressure of the year in the first quarter,” Deborah Weinswig, managing director for Citi Research, New York, said, though she had forecast a drop of only 40 basis points, she noted.
She also said the company expects gross margin for the year to decrease at a level similar to that of the first quarter.
Pressure seems to be mounting on the low-end consumer, Weinswig added, noting that Wal-Mart and others have reported softer-than-expected sales in the first quarter and lowered second-quarter guidance.
“However, while it is appropriate to take a more conservative stance [on Dollar General’s second-quarter results], our long-term view remains favorable,” Weinswig said.
John Heinbockel, managing director for Guggenheim Securities, New York, said he expects “a meaningful pickup” in discretionary comps during the second quarter “as the warm weather finally arrives.”
During a conference call with analysts last week, Richard W. Dreiling, chairman and chief executive officer, said Dollar General boosted its selection of national-brand products to be more relevant to consumers but ended up giving them too many choices that resulted in lower sales of private brands.
"We're going to further expand our private-brand presence again this year and rationalize the SKUs that we've put in," he said. "We're not talking about eliminating the brands, but we want to eliminate sizes that give customers a choice. So we are still going to be relevant and have the national brands, but we just don't want to offer as many alternatives in terms of size."
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Citing one example, he said the company used to carry a private-brand version of Claritin in 12-count, 24-count and 36-count sizes, with the branded item available only in a 24-count size. "So if you wanted less than 24, you bought our private brand and if you wanted more than 24, you bought our private brand. Now the customer has the option across all six SKUs, so in our zest to be a little more relevant, we inadvertently allowed the customer to be able to trade down on the margin side," Dreiling explained. "And while the high-value SKUs are selling, they are putting pressure on the strength side of the ledger, and while [private-brand] units are down, shrink is up. So we're going to continue to tweak that, though it may take several quarters to make that rebound."
For the first quarter net income rose 3.1% to $220.1 million, while sales increased 8.5% to a record $4.2 billion and same-store sales grew 2.6%. The company said it was lowering guidance for the year, with sales expected to increase between 10% and 11% and comps expected to grow between 4% and 5%, compared with earlier projections of 4% to 6%.
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