Dollar General stock fell about 8% during trading Thursday, after the discounter reported that supply chain headaches during the third quarter ate into its margins.
Despite that, and with food-and-beverage sales increasing by more than 12% year over year, the Goodlettsville, Tennessee-based retailer unveiled ambitious growth plans, detailing a road map to open 1,050 new stores in 2023.
For the quarter ended Oct. 28, Dollar General reported same-store sales growth of 6.8% and a net sales increase of 11.1%, to $9.5 billion.
But the retailer was hit with more than $40 million in additional supply-chain costs during the quarter after seasonal goods came in earlier than expected, leaving the company with nowhere to store the items.
In recent weeks, Dollar General has increased its capacity by more than 2 million square feet with the opening of two new, permanent regional distribution hubs in Georgia and Texas, CEO Jeffrey Owen told analysts Thursday, according to a transcript from financial services site Sentieo. Those warehouses will serve as intermediate facilities between import points and Dollar General’s distribution centers.
The company plans to open a new combination distribution center in Nebraska, scheduled to begin shipping by the end of the fiscal year.
Dollar General had previously announced new distribution centers in Arkansas, Colorado and Oregon, scheduled to become operational over the next 18 months.
Cumulatively, the new centers will increase Dollar General’s distribution center capacity by 20%, the retailer said.
But margin issues will remain for the immediate future—especially as shoppers fill their carts with lower-margin food and beverage items, President and CFO John Garratt said.
“We’ve experienced many challenges over the course of this year, including those related to product cost inflation, supply chain dynamics and the evolution of consumer spending,” Garratt said. “We have seen an increased headwind from lower-margin consumables sales mix as customers face growing financial pressure. We expect this headwind to grow in Q4, as our guidance assumes customers continue to feel financial pressures and shift more of their spending to consumable items.”
But Dollar General still sees plenty of upside to its grocery business, executives said. Sales of consumables were up 12.2% in the third quarter, compared with the same period a year ago.
The retailer now sells fresh produce in more than 3,000 stores and plans to add fruit and vegetables to approximately 2,000 stores in 2023, Owen said.
During the third quarter, Dollar General added more than 17,000 cooler doors across its store base, and the retailer is on track to install a total of more than 65,000 cooler doors in 2022.
The moves are part of Dollar General’s DG Fresh initiative, which was rolled out across the entire chain in 2021 with the goal of reducing costs by owning the distribution channels of fresh and frozen goods.
“Despite the meaningful improvements we have made to date as a result of DG Fresh, we believe we still have significant incremental opportunity to drive additional returns with this initiative in the years ahead,” he said.
Dollar General is also adding self-checkout at a growing number of locations. By the end of Q3, self-checkout kiosks were present in more than 10,500 of the retailer’s stores, with about 500 more stores slated to come online by the end of 2022.
Dollar General opened 268 new stores during the third quarter, with plans to open a total of 1,025 for the year. In 2023, the retailer said it plans to undertake 3,170 real estate projects in the U.S., including more than 1,000 new stores, 2,000 remodels and 120 locations.
The retailer ended the third quarter with 18,818 total stores in 47 states.