Dollar General's Q2 2025 Earnings Call: Contradictions in Shrink, Margins, SG&A, Consumer Behavior, and Comp Growth

The above is the analysis of the conflicting points in this earnings call

Date of Call: August 28, 2025

Financials Results

• Revenue: $10.7B, up 5.1% YOY
• EPS: $1.86 per diluted share, up 9.4% YOY
• Gross Margin: 31.3%, up 137 bps YOY
• Operating Margin: 5.6%, up 16 bps YOY

Guidance:

• FY25 net sales growth expected at 4.3%–4.8%; same-store sales 2.1%–2.6%.
• FY25 EPS guided to $5.80–$6.30; assumes ~23.5% tax rate and no share repurchases.
• Outlook allows for softer consumer in 2H; Q4 likely more pressured than Q3.
• Shrink remains a tailwind in 2H, moderating in Q4 on tougher laps.
• SG&A pressure in Q3 from repairs/maintenance and remodel timing.
• Capex $1.3B–$1.4B; ~4,885 projects: 575 US openings (+up to 15 Mexico), 2,000 Renovate, 2,250 Elevate, 45 relocations.
• Redeeming $600M senior notes in Q3 using cash on hand.
• Expect DG delivery available in >16,000 stores by year-end.

Business Commentary:

• Strong Financial Performance and Revenue Growth:
• Dollar General Corporation reported net sales of $10.7 billion for the second quarter of fiscal 2025, up 5.1% compared to the previous year's second quarter.

• The growth was driven by strong performance from new stores and the mature store base, as well as market share gains in both consumable and nonconsumable product sales.

• Shrink and Gross Margin Improvement:

• Gross profit as a percentage of sales increased by 137 basis points, primarily due to lower shrink rates, which improved by 108 basis points year-over-year.

• This improvement was attributed to focused initiatives on reducing shrink, including self-checkout conversion and inventory management.

• Digital and Delivery Expansion:

• Dollar General expanded its delivery capabilities, with its DoorDash partnership now serving more than 17,000 stores, resulting in a 60% year-over-year increase in sales through this platform.

• The expansion of delivery options, including the launch of its own same-day delivery offering and partnerships with Uber Eats, is intended to introduce new customers to the brand and enhance convenience for existing customers.

• Trade-In Customer Growth and Value Proposition:

• The company experienced trade-in growth from middle- and higher-income customers, contributing to positive comp sales in nonconsumable categories.
• Strong value propositions, including everyday low prices and a significant offering of $1 price point items, attracted these customers and supported overall sales growth.

Sentiment Analysis:

• Management reported net sales up 5.1% to $10.7B, comps +2.8%, and EPS up 9.4% to $1.86. Gross margin expanded 137 bps (shrink -108 bps). They raised FY25 guidance and cited market share gains in consumables and nonconsumables, balanced traffic and basket growth, and strong digital/delivery momentum. They acknowledged potential 2H consumer pressure and Q4 moderation but emphasized continued tailwinds from shrink and execution improvements.

Q&A:

• Question from Michael Lasser (UBS): Can shrink gains push operating margin above the 6%–7% LT target or accelerate timing, or will you reinvest?
  Response: They remain committed to the 6%–7% operating margin framework; shrink may exceed 80 bps over time, but focus is on achieving and sustaining the target rather than raising it.

• Question from Simeon Ari Gutman (Morgan Stanley): Is Q2 gross margin a good run-rate, and what execution work remains?
  Response: Gross margin should remain up YOY in 2H but less so in Q4 due to tougher laps; expect SG&A pressure in Q3; operational fixes are largely in late innings with focus shifting to sustaining gains.

• Question from Rupesh Dhinoj Parikh (Oppenheimer): What are the key learnings from DoorDash and Uber, and how incremental is delivery?
  Response: Delivery is incremental with larger baskets; DoorDash sales rose >60% YOY, Uber expands to ~14k stores by Q3-end, and >75% of orders arrive within 1 hour; aiming for >16k DG delivery stores by YE.

• Question from Matthew Robert Boss (JPMorgan): What are you seeing across income cohorts and value, and how should we think about shrink tailwinds?
  Response: All income cohorts are trading to value; DG maintains EDLP and $1 price points; shrink remains a tailwind into 2025 with potential to exceed the 80 bps LT improvement.

• Question from Edward Joseph Kelly (Wells Fargo): Decompose gross margin (LIFO vs markup) and any liability-claims risk?
  Response: Of the 137 bps GM expansion, 108 bps came from shrink with the rest from other factors; liability claims are trending higher in cost but immaterial and reflected in guidance.

• Question from Zhihan Ma (Bernstein): How much of comps is trade-in vs company-specific, and what is sustainable into next year?
  Response: Comps reflect both trade-in and improved execution; plan to retain new customers via a digitized playbook; strong value (e.g., $1/$3 price points) supports sustainable top-line momentum.

• Question from Charles P. Grom (Gordon Haskett): Can comps sustainably exceed 3%, and what about shrink/damages interplay?
  Response: They’re comfortable with a 2%–3% LT comp; remodel programs drive 3%–8% lifts; damages are improving alongside shrink toward the 40 bps LT goal.

• Question from Seth Ian Sigman (Barclays): How do you get back to normal SG&A leverage given 2%–3% comps?
  Response: 2025 has a ~$200M incentive-comp headwind; expect a more normal run-rate exiting 2025; ongoing efficiency and CapEx optimization aim to mitigate SG&A deleverage.

• Question from Kelly Ann Bania (BMO Capital Markets): Break down discretionary comp drivers and inflation/tariffs in 2H.
  Response: Nonconsumable comps were >2.5% with largely flat AUR; tariffs managed via assortment/pricing; 25% of holiday items at $1 and 70% at $3 or less.

• Question from Peter Jacob Keith (Piper Sandler): Impact of the One Big Beautiful Bill and SNAP changes on your customer and outlook?
  Response: Guidance reflects current assumptions; SNAP work-rule effects minimal; tax changes (tips/overtime/SS, child credits) likely provide a tailwind to core customers.

• Question from Robert Frederick Ohmes (BofA Securities): Update on fresh initiatives and competing in rural markets, including delivery.
  Response: DG has produce in 7,000+ stores and its own fresh distribution; delivery brings fresh to rural customers in ~1 hour at value prices, creating a competitive advantage.