Dollar General Earnings: Same-Store Sales Turn Positive, but Margin Headwinds Likely to Persist

Narrow-moat Dollar General's fiscal 2023 fourth-quarter results exceeded our depressed expectations, though shares slid about 5% amid management's mention of continued margin pressure and a more promotional retail environment in fiscal 2024. Same-store sales expanded 0.7% when we'd anticipated a low-single-digit decline. This helped reverse two straight quarters of declines, as a strong 4% uptick in volume offset softness in average ticket. While we're encouraged by the improvement, we note the firm's core low-income consumer continues to grapple with reduced fiscal stimulus and inflationary pressures, which we believe is evidenced by the mid-single-digit percentage sales decline across its discretionary product categories for the full year (though we look favorably upon the 4% gain in consumable sales). Operating margin of 5.9% for the quarter came in about 50 basis points ahead of our forecast. This still represented a 320-basis-point decline from the prior year as the retailer resorted to discounting excess inventory (positively, nonconsumable inventory per store fell 21%), completed its $150 million investment to add store labor hours, and faced headwinds related to shrinkage.