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Balancing growth with tight fiscal focus

BY Jim Frederick

David Tehle, EVP and CFO, Dollar General

Organizational capacity.” That’s Dollar General’s shorthand for the discipline and rigorous financial modeling that the company applies to its rapid store expansion and remodeling program. It sums up Dollar General’s remarkable and sustained ability to balance cash flow and rational capital spending plans with the most determined and aggressive new-store construction and renovation program in all of retailing.

(Click here  to download the full special report.)

“We’re very big on organizational capacity,” said David Tehle, Dollar General’s EVP and CFO. It serves as a motto, he said, for “how we decide how many stores to open or remodels we can do successfully” without sacrificing profitability, sound investment principles or sustained sales momentum.

That wasn’t always the case. Tehle, a 10-year Dollar General veteran, remembers a time when the company “pushed too hard” with its store-expansion schedule, and ended up overextended and shuttering many stores in 2006. Given the rigorous financial disciplines and new information technology Dollar General has embraced since the management overhaul of 2008, however, “we’re not going to make that mistake again,” Tehle promised.

What hasn’t changed is Dollar General’s commitment to organic growth — whatever the outcome of its bidding war with rival Dollar Tree to purchase the Family Dollar chain. “In terms of our capital, our No. 1 priority is investing in the stores,” Tehle told DSN. “And that means opening new stores, doing remodels and relocations, and having the capital necessary to make those stores look like we want them to on the inside.”

It also means “putting capital into organizational infrastructure,” said the CFO. “We’ve got to feed those stores [with] distribution centers. And when we’re opening 600 or 700 stores a year, we’re going to have to look at opening a new DC maybe every two years.”

“We’re targeting about a 6% to 7% sq footage growth in stores each year,” Tehle added. “And we have to make sure we have the right systems … and the right people. So that’s where we’re putting our capital.”

Whatever cash is left each year — and “we always have cash left over,” said Tehle — recently has been invested in repurchasing shares of company stock. “We started our stock buyback program in December 2011, and we’ve bought back $2.3 billion worth,” he noted. “Our investors have supported this move.”

With cash flow strong and the market for dollar stores continuing to expand, Tehle sees years of growth potential ahead for Dollar General. “We’ve identified 14,000 opportunities [for new stores],” he said. “We went public in 2009, and at that time we identified 10,000 opportunities. So it’s actually grown since then.”

  There are two reasons for that, said Tehle. “A lot of that has to do with the economy, which is creating new customers. Also, we’ve got better real-estate software, which has helped us pinpoint locations in a lot more detail. So we feel there’s a huge growth trajectory yet to come.”

It comes down to “a very robust store location process,” agreed Todd Vasos, COO, based on proprietary software and IT systems that analyze a slew of factors, such as local demographics, traffic patterns, local competition and population density to sift out new locations.

The rich potential for new openings across the United States offers plenty of opportunity for domestic expansion, without having to look beyond the nation’s borders for the time being, said Tehle. Although a move into Canada, Mexico or some other country could come down the road, he said, “right now, we’re sticking to our knitting. There are so many opportunities domestically.

‘A lot of magic’ in a small box

To keep close tabs on sales and profitability, Tehle and his team monitor same-store sales performance early each morning. Other key performance metrics tracked by the financial team include gross margin trends, along with sales, general and administrative costs as a percentage of sales. Tehle also focuses daily on operating profit and EBITDA. “When we went private, we began to focus more on EBITDA,” Tehle explained. “That’s the measure that really captures your business, so we take a hard look at that.” In fiscal 2013, Dollar General reported a 3.3% rise in same-store sales and a 9.2% hike in overall revenues, to $17.5 billion. Net earnings topped $1 billion in the face of severe winter weather and a torrid store-construction strategy that saw the opening of 650 new units, and the company also generated enough cash flow to repurchase another $620 million of its own stock.

Those numbers make a telling case for Dollar General as a good investment: Its stock performance in recent years has eclipsed that of both the S&P 500 index and a much smaller index of retail company stocks. Behind that performance, said the CFO, is a winning combination of savvy, responsive merchandising, operating disciplines that control costs effectively and a solid reputation among tens of millions of Americans for providing good everyday value on the products they need.

“There’s a lot of magic to our box,” Tehle declared. “It’s a small box — about 7,500 sq. ft. — and you can open them in rural America and small towns. It doesn’t take that many people for one of our stores to be profitable. We don’t have to be in big cities.”

The other “secret sauce” to Dollar General’s success, said Tehle, is the quality of the management and store people. “I’ve never seen anything like the team that [CEO] Rick Dreiling brought in with him in 2008. It changed the whole nature of who we are and what we’re doing, and allowed us to go public a lot quicker than [former owner and investment firm] KKR planned on. We went private in July 2007, and went public again in November 2009. And it’s all based on performance.” Another benchmark: Dollar General went public in 2009 at $21 per share. As of mid-September, the stock had reached $63 per share.

Thanks to company stock buybacks, Dollar General also has reduced its publicly traded shares from roughly 340 million to 303 million over the past several years, boosting earnings per share and reducing stock dilution.

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Building a culture of opportunity, DG promotes advancement goals

BY Jim Frederick

Bob Ravener, EVP and chief people officer, Dollar General

If any U.S. retail company understands the importance of selling not just its product, but also the experience of consuming that product in its stores, that company is Starbucks. The Seattle-based king of coffee excels at hiring friendly, motivated and upbeat sales people to help create the relaxed, refuge-from-the-world atmosphere that sets Starbucks apart and keeps customers coming back.

(Click here  to download the full special report.)

So whom did Dollar General turn to when filling the key post of SVP and chief people officer during the management change launched in 2008? Veteran Starbucks executive Bob Ravener. That choice speaks volumes about the cultural transformation that continues to resonate at the Tennessee-based discount chain.

Ravener, who has since been promoted to executive VP at Dollar General, oversaw all aspects of human resources activity as SVP of U.S. partner resources at Starbucks prior to joining Dollar General. He also worked as VP of human resources for The Home Depot and gained prior executive experience at PepsiCo and Footstar. And one thing common to all those companies, he told DSN, was the need to foster a culture that can “nurture growth and development” of their employees.

“You’ve got to create the right environment so that they’ll get up every morning feeling that ‘This is the place I want to go to work everyday,’” Ravener asserted. “You can have all the great policies and procedures in the world, but if you don’t have great people, you’re not going to succeed.”

Despite the obvious differences in retail channels, said the HR executive, “People are people. They have the same goals, ambitions and desires.”

Very high on that list of goals is the desire to succeed and advance, “from the entry level sales associate all the way up to the executive recruiting that we do,” said Ravener. “We know that people have choices. So we’ve tried to create a career culture. If someone can start anywhere in our organization and feel like they can have their own career goals and aspirations met here, that’s success for us.”

With that in mind, Dollar General established a formal program of internal placement goals in 2010. “We really made it a priority to establish metrics for internal growth,” Ravener explained. To develop new store managers from its own ranks, for instance, “We historically had low internal placements and set a stretch goal of 50% in 2010, and now over 60% of our store managers are promoted from within, which has helped us nurture that career culture mindset.”

That compares with just 20% of store managers promoted from within in 2008, when CEO Rick Dreiling took the management reins and began a companywide overhaul. The same goes for Dollar General’s district managers, more than 60% of whom are drawn directly from store management.

Said Ravener, “You create the right environment, develop them to excel, and give them room to grow.”

To that end, Dollar General has invested heavily in training, including the creation of leadership development programs to foster employee motivation and advancement. “We established what we call training development centers, or assessment centers, just a few years ago,” said Ravener. “Anybody who gets promoted to district manager today has to go through this assessment center. It’s the same thing for district managers. Before they get promoted to regional director, they have to go through that assessment center.”

That deliberate and detailed process, said Ravener, both gauges the readiness of the candidate and helps his human resources team “build development plans to help the participants accelerate their growth and development.”

The development process also encourages mentoring relationships between district managers, store managers and store employees interested in promotion.

 Ravener credits “the cultural shift with Rick’s leadership” for the change. “In the past, people were hired to do the job. But we’ve always brought people into the organization with an eye on what they can do next, and how we can help them get there. It’s about building a very robust succession plan process.”

The company also presents itself to prospective entry-level employees as a starting point to begin employment. “For people entering the work force for the first time, Dollar General stores provide an ideal foundation of basic work skills along with competitive wages and benefits,” the company noted on its website.

What qualities does Dollar General now look for in new employees? Beyond hiring honest people with a good work ethic, much of the search for store staff revolves around attitude and people skills. “There’s no substitute for ‘happy,’” said Ravener. “It has always been part of the Starbucks strategy. If you think about it, the Starbucks product is good, but what people remember about the experience is the people serving in that environment. So overall, attitude is number one. Then it comes down to a few other core attributes. If people are honest, work hard, are dependable, and have great attitudes … they can go as far as their aspirations take them.”

For Dollar General, establishing a clear, goal-oriented track for advancement isn’t just a feel-good exercise to motivate employees or improve the corporate culture. With the company opening an average of nearly two new stores every day somewhere in the United States, the need for a steady stream of new, capable store managers is critical.

The advancement opportunities are obvious. “I think retailing in general is one of the last places where people don’t need advanced degrees and all this specialized training to move up — where they can bring their core set of skills and start from the bottom and work their way to the top,” said Ravener. “For people in our organization, if you start at a junior-level sales associate, you can be a … store manager in two or three years. So, with the desire and right skills, you can be running a million-plus-dollar business in a very short period of time.”

“We’re a performance-driven culture,” he added. “We communicate that we are always looking for people to take that next step and the company has now developed a pipeline that is helping sustain growth well into the future.”

 

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Building a smarter supply chain system

BY Jim Frederick

John Flanigan, EVP global supply chain, Dollar General

"We no longer ship hummingbird feeders to Florida.”

That’s one example of how Dollar General has smartened up its store replenishment and supply-chain processes in recent years, said John Flanigan, EVP global supply chain. There aren’t enough hummingbirds in the Sunshine State to trigger demand for feeders, he pointed out. Flanigan, who joined the company in May 2008 after managing distribution and logistics for Longs Drug Stores, Safeway and other companies, described the steady evolution of Dollar General’s supply-chain management capabilities as it improves its ability to track and forecast sales by region, store clusters and individual stores.

(Click here  to download the full special report.)

To improve its supply chain management and replenishment processes, Dollar General has created a regional store clustering system for items not considered part of its core mix of planogrammed shelf stock. Using that system, stores are organized into eight clusters, or “bands” in Dollar General parlance, with each band representing historical sales and demand levels for particular classes of products.

“For non-core [inventory], we tend to cluster the stores,” Flanigan explained. “We have eight bands where we segregate the stores based on individual class and department [item movement] levels.”

Under that store grouping system, he added, “we have more than 600 individual classes of merchandise” organized department by department and cluster by cluster, with Band Eight representing the cluster with the highest level of sales for a particular category, and Band One representing the lowest.

That means any store can be grouped into different bands for different product categories in order to facilitate the reorder and distribution process. “A store can be in any one of those bands for [different classes of] items,” Flanigan said. “So it could be in Band Eight for lawn and garden, but in Band Three for outdoor holiday [decorations]. We aggregate those, and we will allocate based on … what’s being serviced for those stores.”

Flanigan and his team constantly seek ways to make the handling, warehousing and weekly shipping of millions of items as seamless and low-cost as possible. “We’re constantly optimizing our effort,” he said. “But as we do that, we want to make sure we have the right products in those stores to meet demand.”

“Over the last five years, we’ve become much more sophisticated in how we break this down,” Flanigan told DSN. For instance, he said, “when I came here, Halloween was all just one class [as] a seasonal department. But … we don’t sell all those items evenly across the country. So now we take the Halloween category and break it down into four different classes” like costumes and spooky lawn decorations.

Clustering stores by sales patterns has been critical, “because today we can’t physically manage product assortment individually for 11,000-plus stores or 660 product classes,” said Flanigan. However, he added, the company will soon leap forward in its ability to forecast product demand at the item-by-item level, eventually bypassing many of its current reorder processes with more immediate product movement tracking, better sales trending analysis and more responsive replenishment capabilities.

“We’re converting our legacy system to a new system we call Supply Chain Solution,” Flanigan said. He called SCS “a much more robust system” with “a really strong forecasting engine” that can accommodate Dollar General’s rapid growth.

“We’ve been implementing SCS … very methodically, so that nothing would jeopardize our ability to serve the stores. When you’re growing at such a rapid rate as we are, if you mess up, you really impact the business. So we’ve run parallel systems very carefully.”

Under the new system, said Flanigan, “everything begins in the stores,” with reorders and replenishment forecasting triggered by point-of-sale data. “We have the capability of looking forward, while maintaining two years of [sales] history, so we understand what takes place on a particular day, and will forecast based on that,” he explained.

“With SCS, we’ll be able to project our sales. The algorithms are so much better. We’ll continue to aggregate the stores by these bands initially, but when we drill down and actually process the data, … we will be much more store-specific. We’re moving in that direction,” he added.

Staying ‘ahead of the distribution curve’

Also moving forward is the physical side of the distribution effort as new inventory storage and replenishment capacity comes on line. To that end, Dollar General’s growth in store count to more than 11,500 units is reflected in its ongoing construction of huge warehouses from which to aggregate and ship product. The company’s next distribution center will open in San Antonio, bringing to 13 the number of company-owned and operated warehouses around the country.

“As a general rule, we say that for every 1,000 stores we have we need another DC,” said Flanigan. “When you’re building 700 new stores a year, you have to be well ahead of the curve.”

Determining where to locate those new DCs, he said, “is all based on where the real-estate plans are, so we look at a five- and 10-year horizon primarily … where you will meet demand.

Most stores — about 95% of the total — are replenished with weekly truckload shipments from those distribution centers, delivered by contracted carriers. The other 5% of stores, including the highest-volume standard Dollar General stores and the larger Dollar General Market stores, receive at least two deliveries each week, according to Flanigan.

Either way, the company strives to make the supply chain as efficient as possible by managing inventory levels, adhering to just-in-time delivery goals and boosting turns on store shelves. “Inventory productivity is important, and we have targets for that,” said Flanigan. “But at the same time, we’re not so driven by turns that it impacts making good business decisions. So if we have an opportunity to purchase something [like a truckload of overstock merchandise at a steep discount], the financial opportunity is more important than the turn.”

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