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Elevated cost of living expenses continued to drive sales of consumables and essentials higher for Dollar General (DG) in Q3, enabling the budget retailer to edge past revenue expectations, but rising costs and contracting margins are squeezing its bottom-line. In addition to the familiar challenges of a cash-strapped lower-income customer, and a highly promotional retail climate, two major hurricanes (Helene and Milton) added to the degree of difficulty for DG in Q3. More specifically, the company incurred $32.7 mln in hurricane-related expenses, mainly from property and store inventory losses, contributing to its shortfall on EPS,  which fell by 29% yr/yr to $0.89.

• Those costs have trickled into Q4 with DG estimating another $10.0 mln hit in the quarter, negatively impacting its FY25 EPS guidance. After slashing its EPS outlook to $5.50-$6.20 from its previous forecast of $6.80-$7.55 last quarter, DG reduced the high end of its guidance last night, projecting EPS of $5.50-$5.90. However, the downwardly revised guidance can't be completely chalked up to hurricanes.
• Intensifying competition, especially from Walmart (WMT), which has been thriving under these difficult macroeconomic conditions, has fostered a highly promotional retail landscape. As such, DG's gross margin has come under pressure, sinking by 120 bps qtr/qtr to 28.8%. The company doesn't see conditions improving any time soon, either, commenting that it anticipates the heightened promotional environment to persist at least through the duration of the year.
• Still, DG isn't planning to sit idle, waiting for optimal conditions to materialize before executing an ambitious growth strategy that's centered on remodeling thousands of stores. In Q3, same store sales growth improved to +1.3% from +0.5% last quarter and CEO Todd Vasos believes the slight upswing is partly due to remodeling efforts that have made DG's stores cleaner and more convenient. With that in mind, the company also announced plans to fully remodel approximately 2,000 stores in FY26, while remodeling about 2,250 stores through its Project Elevate initiative.
• Project Elevate will focus on a mature store base that's not yet old enough to be included in the full remodel pipeline but will still undergo a significant revamp that includes assortment updates, the addition of produce, updated adjacencies, and planogram optimizations. The goal is to enhance the shopping experience and to drive incremental sales growth, although this will be an expensive endeavor. For some context, DG reiterated its FY25 capex guidance of $1.3-$1.4 bln, which supports 2,435 real estate projects. In total, the company is targeting 4,885 real estate projects in FY26.

Overall, DG delivered a mixed Q3 earnings report that showed some stabilization on the top-line, but that modest improvement isn't enough to positively alter the big picture for the stock. The company continues to face margin pressures and rising costs are now becoming more of a concern as it embarks on an aggressive store remodeling plan.