Dollar General Remodel Locations
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Dollar General opened 1,000 new stores, remodeled 1,670 stores, relocated 110 stores and closed 101 units during the 52 weeks ended Jan. 29. Those totals were up across the board from fiscal 2019, when the deep value retailer opened 975 new locations, remodeled 1,024 units, relocated 100 units and closed 67 stores. And on the e-commerce side in 2020, the company stepped up expansion of its click-and-collect service, DG Pickup, to more than 17,000 stores.
As excerpted from the report: Dollar General, Five Below and Family Dollar are among the top five retailers with the most store openings slated for 2023, according to Coresight. Tennessee-based Dollar General leads the way with new store opening announcements for 2023, with more than 1,050 locations set to open this year. The company also plans to complete 2,000 store remodels and 120 store relocations.
\"We are constantly reviewing our stores to better serve our customers,\" Dollar General PR said. \"We are remodeling these locations to maintain consistency throughout our store network, which we are constantly improving. We want shoppers at this store to have the same experience as shoppers in new stores featuring the latest décor and fixtures.
Dollar General said that it remains on track to open 1,050 new stores, remodel 1,750 locations and relocate 100 stores in 2021. It continues to expect capital expenditures in the range of $1.05 billion to $1.15 billion.
The discounter, whose net income totaled $677.7 million, or $2.82 per share, in the quarter ended April 30, up from $650.4 million, or $2.56 per share, in the year-ago period, said that it executed more than 800 real estate projects (260 new stores, 543 remodels and 33 relocations) during the quarter, including store openings in its new PopShelf and larger-footprint Dollar General formats
As part of its strategy, the company plans to open its first store in Idaho, which will expand its presence to 47 states and remodel 1,750 locations. Dollar General also plans to open up to 10 stores in Mexico.
The tradeoff that Dollar General is making is growth at the expense of margins. We know that the higher margin locations are in rural areas and the higher margin dollars are in the non-consumables items. However, Dollar General has expanded into larger MSAs over time, even opening stores in urban areas. And the company has continued to grow the consumables business, selling a higher mix of lower-margin frozen and packaged foods and now even selling produce. The benefit is the uptick in same store sales but it comes with margin pressure. A remodel with more cooler doors and adding produce leads to a 15% uptick in same store sales.
It may be helpful to compare Dollar General to its largest competitor in the \\u201Cdollar\\u201D space, Dollar Tree. While there may be lots of overlap in the core customer, Dollar Tree offers most items close to the $1 price point and has a much higher non-consumable mix at 50% vs 75% for Dollar General. Consumables generally have lower gross margins than non-consumables. Dollar Tree leans more urban while Dollar General has more of its stores in rural areas. Dollar General actually compares better to Family Dollar, which was acquired by Dollar Tree in 2015. And we\\u2019ll make specific comparisons with Family Dollar later on.
Dollar General spends almost $800M on capex annually, most of which is spent on building new stores, remodels or relocations of existing stores or expanding distribution capabilities. Over the past 10 years, 35% of capex has been spent on remodels and relocations, an indication that the company continuously looks to improve the customer experience. New stores make up 32% of total capex, which is the highest returning use of capex (we\\u2019ll go over this in detail shortly). Distribution and transportation has become a larger part of capex over the past 5 years as the company has increased density across its many MSAs. Any improvement in efficiency in the supply chain leads to better margins (lower incremental costs) and increased sales (lower stock outs). And lastly, 6% of capex has been dedicated to IT and technology upgrades.
While there isn\\u2019t perfect publicly available data for remodels/relocations and new store buildouts, we can estimate the returns for both of these uses of capital over the past 10 years. We caveat the analysis by noting that the cost varies across geographies and the size and scope of each real estate improvement activity, but on average the cost to remodel/relocate a store has ranged from $200k to $300k. We can assume that a relocation is much more expensive but let\\u2019s go with averages for now. We know from company disclosures that a typical remodel increases same store sales by 4%-5%, whereas a remodel with cooler expansions increases SSS by 10%-15% (15% if produce is introduced). And a relocation adds a 20%-25% increase in SSS.
Assuming that incremental earnings for a store remodel are the gross profit dollars \\u2013 taxes, we can estimate what the returns of the remodel capex would be for each of the different scenarios, assuming that the cost to remodel/relocate was the average. We assumed that only an underperforming store would be remodeled or relocated and we adjusted the sales for this store down by 15% from the average. The analysis is imprecise, but it\\u2019s helpful to see the range of outcomes to be between 5%-27% prior to the Tax Cuts and Jobs Act of 2017 and 6%-31% post the tax cut. On average, we estimate that a remodel/relocation averages to 18%-23% returns on capital prior to the tax cut and 22%-27% after the tax cut.
The reinvestment opportunity is the biggest question for Dollar General because the company already has over 16,000 locations. The company stays busy, undertaking remodels/relocations and opening new stores to the amount of 15% of its existing store base annually. In FY20, the company expects to remodel/relocate 1,600 stores and open almost 1,000 new stores. At the company\\u2019s 2016 Investor Day, Dollar General made the case for 13,000 incremental new store locations that have been identified by the company. That number has more or less stayed the same four years later, which implies that Dollar General has expanded its view of its opportunity set.
Goldman did a nice estimate of the \\u201Cdollar\\u201D store opportunity that remains in the U.S. in an initiation report from May 2020. They segmented the top 900 MSAs by the number of total number of \\u201Cdollar\\u201D stores per Wal-mart location, number of households, and existing market shares. Goldman estimates that the incremental opportunity is much smaller than management has stated at just 7,500 incremental locations.
Even with the company\\u2019s impressive annual new store expansions and remodels/relocations, the company\\u2019s reinvestment rate is on the low-end of the companies we\\u2019ve analyzed on AGB thus far (similar to Starbucks). We estimate that Dollar General reinvests 30% of its capital annually. The remaining capital in the range of 50%-70% has been spent on share repurchases and dividends, which have generated a good return for the company for the past 10 years. With a 30% reinvestment rate, we estimate that intrinsic value compounds at 9%-11%, annually. We have to keep in mind that this doesn\\u2019t take any share repurchases into consideration and we\\u2019d point out that the consistency of returns year after year is pretty remarkable. 59ce067264
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