Q3 2026 Earnings Call: Contradictions Emerge on Strategic Shifts, Shrink Reduction, and Margin Strategies

Date of Call: December 4, 2025

Financials Results

• Revenue: $10.6 billion, up 4.6% YOY (vs $10.2B in prior-year Q3)
• EPS: $1.28 per diluted share, up 43.8% YOY
• Gross Margin: 29.9% of sales, up 107 basis points YOY (despite a ~79 bps LIFO headwind)
• Operating Margin: 4.0% of sales, up 82 basis points YOY (operating profit $425.9M, up 31.5% YOY)

Guidance:

• Net sales growth for fiscal 2025 expected at approximately 4.7%–4.9%.
• Same-store sales growth expected at approximately 2.5%–2.7%.
• EPS guidance $6.30–$6.50 for FY2025; assumes an effective tax rate of ~23.5% and no share repurchases under the existing program.
• Capital spending expected toward the low end of $1.3–$1.4 billion; ~4,885 real estate projects in 2025 (575 new U.S. stores, up to 15 in Mexico, 2,000 Renovate, 2,250 Elevate, 45 relocations).
• Plan to redeem an additional $550M of senior notes early (guidance includes ~ $9M incremental Q4 expense).

Business Commentary:

• Sales and Market Share Growth:
• Dollar General reported a 4.6% increase in net sales to $10.6 billion in Q3 compared to $10.2 billion in the previous year's third quarter.
• The growth was driven by an increase in market share in both dollars and units for highly consumable and non-consumable product sales, supported by a balanced sales growth with positive comp sales across all categories.

• The company noted that customer traffic drove the sales increase with a 2.5% same-store sales growth, although average basket size was relatively flat.

• Financial Performance and Cash Flow:

  

• Gross profit as a percentage of sales increased by 107 basis points to 29.9% in Q3.
• Improvement in gross margin was primarily due to higher inventory markups and reduced shrink, partially offset by an increased LIFO provision.

• Dollar General's cash flow from operations grew by 28% year-to-date through Q3, reaching $2.8 billion.

• Real Estate and Remodel Initiatives:

• The company executed 196 new store openings in Q3, focusing on rural markets with an 8,500 square foot format.
• Dollar General completed 651 Project Elevate remodels and 524 Project Renovate remodels, expecting a first-year annualized sales comp lift of approximately 3% for Project Elevate and 6% for Project Renovate.

• The real estate strategy for 2026 includes 450 new store openings, 2,000 Project Renovate remodels, 2,250 Project Elevate remodels, and 10 additional stores in Mexico.

• Digital and Delivery Expansion:

• Dollar General expanded its delivery capabilities through partnerships with DoorDash and Uber Eats, providing same-day delivery in more than 17,000 stores.

• The delivery options drove significant incrementality and sales growth, with over 75% of orders delivered in one hour or less.
• The company's digital initiatives, including the DG Media Network, are seeing double-digit growth, enhancing customer experience and attracting new customers.

Sentiment Analysis:

Overall Tone: Positive

• "We are pleased with our third quarter results," "strong earnings results that significantly exceeded our expectations," "we are confident in our long-term financial framework," "we are ahead of schedule on our progress," and management repeatedly described strong top-line momentum, margin expansion and increased confidence in future drivers such as shrink improvement, remodel lifts and DG Media Network growth.

Q&A:

• Question from Rupesh Parikh (Oppenheimer & Co. Inc., Research Division): For Q4, what are the puts and takes on gross margin, and longer-term, how confident are you in delivering the next round of gross-margin improvement (retail media, mix shifts, damages, etc.)?
  Response: Expect further gross-margin expansion in Q4 driven by continued shrink improvement, private-label/non-consumable mix and supply-chain gains; partly offset by LIFO headwinds—management is confident there is additional long-term gross-margin upside from shrink, damages, mix and retail media.

• Question from Zhihan Ma (Sanford C. Bernstein & Co., LLC., Research Division): Are there additional upside opportunities from remodels (noting current 3%–6% lifts) and how does the changed competitive landscape affect your long-term real-estate opportunity and growth pace?
  Response: Project Elevate is delivering ~3% first-year lifts and Project Renovate ~6%; management is confident in scaling both, sees ~11,000 U.S. store opportunities, and will grow thoughtfully (planned ~450 new U.S. stores in 2026) with attractive new-store returns (~16%–17%).

• Question from Matthew Boss (JPMorgan Chase & Co, Research Division): How is the low-to-middle‑income customer holding up (traffic vs basket) and any puts/ takes for next year relative to returning earnings growth to ~10% with 2%–3% comps and the moderated real-estate plan?
  Response: Low/middle-income customers remain pressured but are shopping more (traffic-driven comps); company is retaining new customers, balancing price/promotions and believes the business is stabilized and tracking toward its long-term framework—formal 2026 guidance to be provided in March.

• Question from Seth Sigman (Barclays Bank PLC, Research Division): Can you quantify digital/delivery incrementality, its contribution to comps and how it changes long-term economics/margins?
  Response: DG Delivery shows >70% incrementality with larger baskets and strong repeat rates; digital is sales- and profit-accretive, brings new customers and strengthens DG Media Network monetization.

• Question from Michael Lasser (UBS Investment Bank, Research Division): You've seen several quarters of ~2% comps—is that the ceiling, and would you need to become more promotional (sacrificing margin) if headwinds like SNAP appear?
  Response: Management views ~2%–3% comps as sustainable, driven by traffic and real-estate/remodel contributions (150–200 bps), and does not expect to increase promotional activity in the near term.

• Question from Simeon Gutman (Morgan Stanley, Research Division): How should we think about returning to 6%+ operating margins and the timing/role of retail media?
  Response: Margin expansion will be driven primarily by gross-margin drivers (shrink/damages—expecting meaningful bps of improvement), private brands, non-consumable mix, supply-chain efficiencies and a growing DG Media Network; media is early but expected to be a meaningful longer-term contributor while SG&A deleverage is being managed and AI is an emerging efficiency opportunity.

• Question from John Heinbockel (Guggenheim Securities, LLC, Research Division): Where is the biggest opportunity on labor productivity and can shrink be reduced toward ~1% without hurting sales?
  Response: SKU rationalization and operational improvements are the primary levers; management believes shrink can be driven materially lower (beyond original targets) via these initiatives without adverse top-line impact.

• Question from Scot Ciccarelli (Truist Securities, Inc., Research Division): How have inventory declines affected markdowns and shrink, and when would you need to rebuild inventory?
  Response: Inventory and SKU reductions (~2,500 everyday SKUs cut) have improved shrink/markdown outcomes and working capital; management sees many categories at optimal levels and does not need to broadly rebuild inventory today—further category optimization planned.

• Question from Charles Grom (Gordon Haskett Research Advisors): Can you amplify the strong start to November (traffic vs ticket) and explain the competitive moat versus Amazon/Walmart+ in rural markets?
  Response: Q4 began strongly with traffic-led strength and SNAP timing was net neutral/positive (consumers used cash then benefits); the moat is a deep rural footprint and rapid delivery (many orders delivered in an hour or less), which management says is difficult for competitors to replicate.

• Question from Spencer Hanus (Wolfe Research, LLC): What tailwind do you expect from remodels in year two, and any change in the 3%–4% price gap versus mass?
  Response: Management expects ongoing upside from remodels (initial lifts sustained and potential to improve over time), sees everyday pricing still within the targeted 3%–4% gap versus mass, and reports improving price perception aided by the $1 assortment and promotional cadence.

Contradiction Point 1

Strategic Focus and Investment Allocation

It reflects a shift in strategic focus and investment allocation, which could impact the company's long-term growth trajectory and operational efficiency.

What factors affected Q4 gross margin, and what are the long-term improvement prospects? - Rupesh Parikh (Oppenheimer & Co. Inc., Research Division)

2026Q3: Shrink improvements have given us confidence in delivering on long-term gross margin expectations. There's potential for more improvement than initially thought. Damages are showing positive results, and mix and media network initiatives are expected to contribute significantly. - Todd Vasos(CEO & Director)

Can you sustain a 6%+ operating margin long-term? Where are the largest opportunities for growth? - Rupesh Parikh (Oppenheimer)

2024Q3: Investments in labor and inventory are important. Redeploying labor from smart teams to stores is key. Optimizing supply chain, SKU rationalization, and focusing on fundamentals are crucial. Strong actions will drive improvements in customer satisfaction and sales. - Todd Vasos(Ceo)

Contradiction Point 2

Shrink Improvement Expectations

It involves changes in financial forecasts, specifically regarding shrink improvement expectations, which are critical indicators for investors and impact cost efficiency.

Where is the opportunity in labor productivity? Can inventory shrinkage be reduced to 1% without affecting sales? - John Heinbockel(Guggenheim Securities, LLC, Research Division)

2026Q3: We believe that our shrink measures are delivering results, and we believe there's opportunity for even lower shrink levels, enhancing the long-term framework. - Todd Vasos(CEO & Director)

Will the 80+ bps from shrink allow you to reach the 6-7% operating margin next year, necessitate a long-term margin range recalibration above 7%, or should some upside be reinvested to drive top-line growth? - Michael Lasser(UBS Investment Bank, Research Division)

2025Q2: We are optimistic that we could potentially outperform on shrink and get a little bit more than those 80 basis points over the mid- to longer term. - Kelly M. Dilts(CFO)

Contradiction Point 3

Margin Improvement Strategy

It involves the company's strategy for improving gross margins, which is crucial for financial performance and investor expectations.

What factors affected Q4 gross margin, and what is the long-term outlook for improvement? - Rupesh Parikh (Oppenheimer & Co. Inc., Research Division)

2026Q3: Shrink improvements have given us confidence in delivering on long-term gross margin expectations. There's potential for more improvement than initially thought. - Todd Vasos(CEO & Director)

Is the small box value model structurally challenged? How do you plan to regrow customers and build margins? - Michael Lasser (UBS Investment Bank, Research Division)

2025Q2: The near-term focus is on markdown investments to drive sales. Long-term, the focus is on underlying low-income consumer drivers and new store opportunities. - Kelly Dilts(CFO)

Contradiction Point 4

Consumer Behavior and Promotional Strategy

It involves the company's understanding and response to consumer behavior and promotional strategies, which are key for driving sales and market share.

Could you clarify digital incrementality's contribution to comp growth and its impact on the business's economic model? - Seth Sigman (Barclays Bank PLC, Research Division)

2026Q3: Our digital platform has seen high incrementality rates and larger basket sizes. We're expanding into rural America with same-day delivery, enhancing our proposition. - Todd Vasos(CEO & Director)

Is the guidance conservative? Are consumers responding well to promotions? - Rupesh Parikh (Oppenheimer & Co. Inc., Research Division)

2025Q2: The guidance reflects softer sales trends and increased markdowns. Consumer response to promotions has been positive and immediate, with more promotional activity planned. - Kelly Dilts(CFO)

Contradiction Point 5

Shrink Reduction and Management Strategy

It involves the company's focus and progress in reducing shrink, which is critical for operational efficiency and profitability.

What opportunities exist for improving labor productivity? Can shrink be reduced to 1% without affecting sales? - John Heinbockel (Guggenheim Securities, LLC, Research Division)

2026Q3: We're recalibrating our shrink expectations due to SKU rationalization. We believe there's opportunity for even lower shrink levels, enhancing the long-term framework. - Todd Vasos(CEO & Director)

Has this transition period changed your reinvestment and margin expectations? Are there any cohorts of stores to rationalize? - Simeon Gutman (Morgan Stanley, Research Division)

2025Q2: Shrink is expected to be approximately 2% for the full year. While we improved our inventory position in the quarter, we've experienced higher than expected shrink. - Todd Vasos(CEO)