Retail is a harsh industry with competition coming from nearly every direction. But it's been proven time and again that a niche within such a massive industry can find success. Discount retail chain Dollar General (DG 6.14%) is a prime example of this; the company's built an empire of more than 18,000 stores across the United States, selling low-cost products in rural markets.
But rather than rely on what's already worked for the company, it's launched a new store brand to pursue long-term growth. Here's what investors should know about pOpshelf, its potential impact on the business, and why Dollar General is poised to be a long-term winner moving forward.
A fun, new retail brand
Dollar General is taking notes from the success of companies like Five Below, which became a $9 billion company by offering shoppers a treasure hunt-like experience. Their stores feature fun and flashy low-priced items like cheap makeup, toys, home decorations, and clothing accessories.
Image Source: Getty Images.
Dollar General launched pOpshelf as a new store brand in late 2020, starting with two concept stores in Nashville, Tennessee. The pOpshelf stores sell most items for $5 or less, and the vibrant store theme puts it directly in competition with stores like Five Below.
The company is steadily expanding the idea and now has 53 stores across six states. Management's been pleased with the success of the store concept and announced plans to have 1,000 stores by 2025.
Dollar General seems well-positioned to scale its pOpshelf concept because the existing store network already has nationwide distribution set up, and so it's probably not a stretch for the company to work pOpshelf inventory into its logistics.
Bringing growth and higher margins
Dollar General has averaged revenue growth of 10% over the past decade, so the business isn't struggling to grow. But as an investor, I like the proactive direction that Dollar General is taking to drive future growth over the long term.
It's an opportunity for Dollar General to boost its growth by quickly moving in on a new and successful store concept. Five Below's been around since 2002 but still only has roughly 1,100 stores across 40 states. Dollar General is essentially using its existing size and deep pockets to blitz this new market opportunity.
It will take time for pOpshelf to move the needle for Dollar General. The company did $34 billion in revenue over the trailing 12 months, and management expects pOpshelf stores to generate under $2 million in sales in their first year. Even when the company gets to 1,000 stores, roughly $2 billion in total annual sales will still be a small piece of a bigger pie.
DG Gross Profit Margin data by YCharts.
However, management could lean on pOpshelf for long-term expansion opportunities, and these stores carry higher margins than Dollar General's existing store model. The company indicated that initial gross margins for pOpshelf stores are 40%, which is superior to Dollar General's overall gross profit margins over the past decade. In other words, the store concept not only can help with growth but also positively influence the company's profitability as it contributes more over time.
Still a stock worth considering today
Investors should probably temper their short-term expectations because pOpshelf stores will still be a relatively small part of the business by 2025. However, that doesn't mean Dollar General isn't a fantastic potential investment today.
The company's 2022 expansion plans include nearly 3,000 projects, and 1,110 of those are new stores. Even if a large chunk of those is pOpshelf locations, Dollar General has proven aggressive in putting traditional Dollar General stores all over the United States. The company's store count has grown from 10,506 in 2012 to more than 18,000 today, and one could probably expect that to continue.
Dollar General is also just beginning to expand outside the United States, entering Mexico with 10 stores by the end of 2022. International stores are unproven, but as a retailer of low-cost products, the company could gain traction in emerging markets where consumers have less disposable income. Meanwhile, the stock trades at a price-to-earnings ratio of just over 19.
Considering the company has grown earnings per share an average of 19% annually over the past decade, I'd argue that the stock is attractive today. Investors get the benefit of an already strong retail business with double-digit revenue and earnings growth, plus the long-term upside of not only a new store concept but also international market growth.
