Dollar General (DG)

(Q1 2025 Letter)

Dollar General is a discount retailer with a 20,000 store footprint that lies within five miles of 75% of the US population. Sales of $41 billion provide the scale and the expansive store footprint provides the network density that enables Dollar General to serve its rural customers with discounts of upwards of 40% compared to competitors. Despite a proven business model and a track record of profitable growth stretching back to 1939, Dollar General is trading near an all-time low valuation multiple due to several fixable missteps.

Dollar General’s missteps took root during the global pandemic. After a stimulus-fueled boom in consumer spending met with procurement challenges from supply chain disorder in 2021, Dollar General took on excess inventory to rectify what was then its largest out of stocks in over fifteen years. As consumer demand pulled back following the pandemic, Dollar General was stuck leasing expensive temporary warehouse space to house this inventory. Excess inventory was pushed to the stores to alleviate the pressure on temporary distribution centers, and stores had too much of the non-consumable inventory that customers did not want (18% of mix), and not enough of the high velocity consumable inventory (82% of mix) that customers did want. As store managers became bogged down with managing and stocking excess inventory, recent rollouts of self-checkout counters created the perfect storm for elevated shrink. Operating margins went from normalized levels of over eight percent to five percent, the multiple went from a premium to the market to a meaningful discount, and the board brought back the proven former CEO for a second act. With Dollar General, we see four paths to value creation.

First, Dollar General is fixing the problems that arose during the pandemic. These simple actions include exiting temporary warehouse facilities and removing self-checkout from stores. Collectively, these simple actions provide a tailwind to margin growth through the balance of 2025.

Second, after firmly establishing a first mover advantage in underserved small towns across America, Dollar General is putting a greater focus on efficiency. There are three main parts to this. One, Dollar General is reducing SKU count per product from six to three. Given that its core customer shops at Dollar General in large part because of the upwards of 40% discount versus competitors (if there are any), stocking six varieties of a consumable product is an unnecessary drain on resources. From distribution centers down to the stores, focusing on the top selling SKUs increases efficiencies by necessitating less forecasting, reducing the risk of overstocks and obsolescence, and keeping inventory fresh and storage costs low. Two, Dollar General’s SKU optimization feeds into needed distribution center redesigns. In an age of robotic assisted logistics, Dollar General only added automation to a distribution center for the first time in 2024. Dollar General has ample opportunity for expanding margin enhancing logistics optimizations such as cross docking, case pack optimization, rolltainers and planogram sorting that collectively enable seamless product flow from distribution center to store shelves. SKU rationalization makes this logistics redesign easier as simplified products to track, order and replenish enables efficiency gains from greater optimization of warehouse space. Three, SKU and distribution process optimization drive greater store efficiency. The post-pandemic

period of excess inventory and elevated demands on store personnel brought store managers away from the front of the store as they had to focus on display management. In optimizing SKUs and distribution processes to reduce floor stands and display rotations, Dollar General moves towards the Costco and Aldi’s model where logistics become more “fingerprintless” as more products go straight to the shelf. This improves the customer experience by having store managers at the front of the store, and provides a near term tailwind from reduced shrink. Collectively the SKU, logistics, and store management redesigns stand to grow margins past normalized historical highs in the coming years.

Third, with DG Media, Dollar General is growing an underutilized channel to use its first party data to connect with customers and to drive traffic. Dollar General’s scale inherent in $41 billion in sales makes it a top five channel (and a high margin channel on account of the small pack sizes) for a majority of its consumer product group suppliers. This scale means that suppliers come to Dollar General to move product, yet Dollar General’s digital channel to push promotions and drive traffic has not fully tapped into this vendor support opportunity. A home delivery rollout to half of Dollar General’s store footprint by the end of 2025 (at no cost to Dollar General) puts in place the missing piece to drive this digital engagement. By virtue of its expansive store footprint, Dollar General is uniquely able to deliver to small town America in under one hour. As

customers become more engaged digitally with DG Media, Dollar General stands to accrue benefits from sales growth, vendor support, and importantly, driving customer pull down from more technologically oriented mid and upper income consumers.

Fourth, while we believe our investment in Dollar General will create shareholder value regardless of the economic environment, it stands to benefit disproportionately in any economic slowdown. Dollar General’s position as a discount retailer with limited competition and an 82% mix of recurring consumable sales means that the business is not only resilient in recessions, but it also gains middle- and upper-income customers during periods of economic stress. Due to the peculiarities of the post pandemic environment (low unemployment, real wage growth for upper income consumers but not lower income consumers), Dollar General did not experience its historical consumer trade down but was exposed to a core customer spending pullback. This dynamic began to change in the fourth quarter of 2024 and throughout the first quarter of 2025 on account of concerns over the economic outlook. As the mid and upper income trade down continues to accelerate, Dollar General stands to grow sales, earnings, and as that happens, its market multiple should return to historical levels.

In Dollar General we see a proven business model with several interconnected issues that are collectively inefficiently consuming resources. With the backdrop of easily executable self-help initiatives and longer term tailwinds, we see a credible path for Dollar General to return to its historical shareholder value creation.