Shrink Reduction Drives Dollar General's Gross Margin to 31% in Q1

Dollar General Corporation’s DG first-quarter fiscal 2025 results witnessed a meaningful improvement in the gross margin, which reached 31% from 30.2% in the year-ago period. This 78-basis-point improvement was primarily driven by lower shrink and higher inventory markups. The company's shrink mitigation efforts contributed 61 basis points to margin expansion. This suggests that Dollar General’s strategic focus on cutting inventory loss is gaining traction and translating into tangible benefits.

Management remains confident that progress on shrink control will continue to support gross margin expansion through the remainder of fiscal 2025. The improvement reflects ongoing operational enhancements across stores, including a tighter control environment and the successful execution of initiatives such as inventory reduction, SKU rationalization, improved retail turnover and targeted shrink incentive programs. Stores that never had self-checkout installed have shown shrink improvements comparable to those where self-checkout was removed.

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 second quarter, contributing to a projected 60-basis-point improvement for fiscal 2025.

How DG’s Shrink Progress Compares to TGT & ULTA

Target Corporation’s TGT first-quarter fiscal 2025 gross margin rate of 28.2% was down 60 basis points year over year, but it could have been worse. Target reported about 120 basis points of gross margin benefit from reduced shrink — a notable reversal of the elevated losses seen during 2022 and 2023. Management conceded that the bulk of the shrink recovery may have now played out, and Target will need to rely on other levers, such as merchandising mix, cost efficiencies or pricing strategies, to maintain or expand margins.

Ulta Beauty, Inc. ULTA is also leaning on shrink reduction to help protect margins in a tough retail environment. In the latest quarter, Ulta Beauty’s gross margin dipped slightly to 39.1% from 39.2% a year ago, with lower shrink partially offsetting pressure from fixed costs and weaker other revenues. Ulta Beauty continues to prioritize shrink management, making it a key lever as the company works to stabilize profitability.

Dollar General’s Price Performance, Valuation and Estimates

Dollar General stock has rallied 22.1% over the past three months compared with the industry’s growth of 2.8%. 
 

Dollar General’s forward 12-month price-to-earnings ratio of 19.16 reflects a lower valuation compared to the industry’s average of 32.34. DG carries a Value Score of B.
 

The Zacks Consensus Estimate for Dollar General’s current financial-year sales suggests year-over-year growth of 4.4%, while estimates for earnings per share imply a decline of 2.7%. 
 

Dollar General currently carries a Zacks Rank #3 (Hold). 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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