Dollar General's Shrink Reduction Is Now the Key Margin Tailwind

Dollar General Corporation DG is witnessing a pivotal shift in its financial performance as efforts to mitigate inventory shrink emerge as the primary catalyst for gross margin expansion. This was evident in the third quarter of fiscal 2025, when gross margin expanded 107 basis points year over year to 29.9%, with lower shrink identified as a key driver alongside inventory markups. Shrink alone improved by roughly 90 basis points versus the prior year, contributing to operating margin expansion during the quarter.

Management emphasized that shrink improved not only in stores that previously operated self-checkout but also across roughly 6,500 locations that never had self-checkout capabilities. This suggests the benefits are structural rather than one-time fixes tied to a single operational change. Dollar General pointed to SKU rationalization, tighter inventory controls and improved in-store execution as contributors to the sustained reduction in losses.

While external pressures such as tariffs and cost inflation still loom, shrink no longer appears to be the margin drag it once was. The sustained improvement in shrink is a critical factor in Dollar General's ability to maintain and potentially expand its gross margin in the current dynamic retail landscape. We expect the gross margin to expand by 50 basis points in the fourth quarter, contributing to a projected 90-basis-point improvement for fiscal 2025.

What the Latest Metrics Say About Dollar General

Dollar General, which competes with Costco Wholesale Corporation COST and Target Corporation TGT, has seen its shares up 97.8% in the past year compared with the industry’s growth of 6.9%. Shares of Costco and Target have dropped 5.8% and 12%, respectively, in the aforementioned period.
 

From a valuation standpoint, Dollar General's forward 12-month price-to-earnings ratio stands at 20.67, lower than the industry’s ratio of 33.35. DG carries a Value Score of B. Dollar General is trading at a premium to Target (with a forward 12-month P/E ratio of 14.88) but at a discount to Costco (47.67).
 

The Zacks Consensus Estimate for Dollar General's current financial-year sales and earnings per share implies year-over-year growth of 4.8% and 9.6%, respectively. For the next fiscal year, the consensus estimate indicates a 4.1% and 9.2% rise in sales and earnings, respectively.
 

Dollar General currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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This article originally published on Zacks Investment Research (zacks.com).

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