Dollar General's nearly yearlong foray into tobacco sales already has started to pay off, with those customers now beginning to linger awhile and choose more than "a soda and a chip" if they buy something besides cigarettes, the Goodlettsville-based retailer reports.
The company announced last December that it would add tobacco products to all of its stores by the middle of this year, and so far the move is providing a big boost financially, Dollar General Chairman and CEO Richard Dreiling told analysts this week during a conference call to discuss the company's third-quarter financial results.
Tobacco products -- and the additional customer traffic they brought to the stores -- helped Dollar General boost its third-quarter sales 10.5 percent over the same period last year, to $4.4 billion, with comparable-store sales up 4.4 percent, the company reported.
"As we expected, the addition of tobacco products resulted in strong customer traffic growth throughout the quarter," Dreiling said.
"When we started the tobacco journey, one-third of our cigarette sales were by themselves, one-third were what we would call 'a smoke and a coke,' where they would grab a cigarette and maybe a soda or a chip," he said. "And then one-third is where the cigarettes were actually going into a basket that was beginning to grow."
But in the third quarter, 44 percent of cigarette shoppers bought more, and just 26 percent opted for tobacco alone, Dreiling said, adding, "So we're beginning to convert the cigarette customer into a shopper."
Dollar General's stock closed at $60.20 a share on Friday, close to the 52-week high of $60.25. The 52-week low was $39.73.
Dollar General told shareholders in its third-quarter financial report last year that it was moving into tobacco sales after trying them in a few stores, and said the move was precipitated in part by "competitive pressures." Rival Family Dollar Stores had already begun selling tobacco.
The company also noted that its core customers are more likely to smoke than the national average. Family Dollar began adding cigarettes to its stores in 2011, and has said that about a third of its customers are smokers, compared with less than 20 percent of the adult U.S. population overall.
Dollar General began testing tobacco sales in Nevada in 2011, and expanded the test to Florida early last year. The company found that the average purchase per customer was $14 when tobacco was included, versus an average of $11 otherwise.
Tobacco sales haven't increased profits by the same percentage as overall sales, though, as the margins on cigarettes and other tobacco products are lower than for many of Dollar General's other items, the company said. Still, third-quarter operating profit increased 8 percent, to $390 million or 8.9 percent of sales.
"The addition of tobacco products has had a significant impact on growth in our customer traffic, which I continue to believe is the most-important metric with regard to evaluating the success of our tobacco initiative," Dreiling said. "We're very pleased with the progress we made in building our market share in tobacco. Going forward, we expect both traffic and transaction size to build as customer awareness of tobacco products in our stores continues to grow."
The company recently also began testing gasoline sales at a Dollar General Market store in Alabama, and "so far, the store has surpassed our expectations," Dreiling said.
No plans have been made yet to expand gasoline availability, but he said the Alabama store is "pumping gas at the rate a convenience store would, so we're very, very pleased with what we're seeing."
Looking ahead to 2014, Tehle said the company plans to open about "650 new stores for the full year" and an additional 73 stores in the fourth quarter.
Dollar General opened its 11,000th store in October in Murfreesboro. It has added more than 3,000 stores since 2007, more than doubling its revenues.
The company signed an agreement in November to sell and lease back 233 of its stores.
"This transaction is expected to close in January, and result (in) net proceeds to us in excess of $200 million, said David M. Tehle, the company's executive vice president and chief financial officer. The proceeds will be used to repurchase company shares, he said.