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Dollar General shifts supply chain to trump tariff woes

Dollar General Corp. executives said Aug. 29 that they are confident ongoing efforts to shift product sourcing out of China will protect the company from the impacts of tariffs.

The retailer raised its sales growth outlook for fiscal 2019 after beating second quarter earnings expectations. The new guidance included the company's expected impacts of current and scheduled tariffs.

Dollar General's stock shot up 10.5% in midday trading Aug. 29 to $155.87 a share.

Tariff impact mitigation is at the forefront of Dollar General's merchandising efforts, CEO Todd Vasos said during an earnings call Aug. 29. Since May 10, the U.S. has imposed 25% tariffs on Chinese goods, as part of an ongoing back-and-forth over trade. Additional increases in tariffs on Chinese goods are expected Oct. 1, Sept. 1 and Dec. 15.

Dollar General has worked to diversify the countries from which it sources in response to tariffs, Vasos said.

"We have already reduced our sourcing exposure to China this year alone by approximately 7%, and we continue to lay the foundation for ongoing success in these efforts," Vasos said. "The great thing is we've had boots on the ground in Mexico, Vietnam, Cambodia and many other Southeast Asian countries, including India as well, for many, many years."

Dollar General has also negotiated with vendors, substituted products and reengineered them to help offset impacts from tariffs, Executive Vice President and CFO John Garratt said.

Previously, Vasos said Dollar General expected to increase prices for its customers but did not reiterate that approach during the Aug. 29 call.

Dollar General also expects to invest about $55 million during the year on initiatives including DG Fresh and Fast Track, Garratt said during the call.

DG Fresh is Dollar General's shift to distribute its own fresh and frozen goods from central cold storage warehouses. Fast Track is an effort to increase labor productivity, enhance customer convenience and further improve on-shelf availability. As part of the Fast Track initiative, Dollar General plans to pilot self-checkout in select stores in the back half of the year, Vasos said.

Dollar General is pleased with the progress and gross margin improvement spurred by DG Fresh, Vasos said. Shipments from the first three DG Fresh facilities are underway, and a fourth DG Fresh facility is scheduled to begin shipping in the next few weeks, Vasos said.

Dollar General is now self-distributing to more than 3,500 stores, which is an increase of about 2,700 stores from the end of the first quarter, Vasos said. The company has more than 16,000 locations in the U.S., Vasos said.

"While produce is not included in our initial rollout plans, we believe DG Fresh could provide a potential path forward to expanding our produce offerings to more stores in the future," Vasos said.