Dollar General Q2 2025: Gross Margin Gains Tested by Rising Operating Costs

In its latest quarterly report, discount retail giant Dollar General offers a fascinating look into its operational performance. While the headline numbers show solid growth, a deeper dive into the company's income statement reveals a compelling story of improved merchandise profitability being tested by rising operating expenses. Let's break down the key takeaways from the company's Q2 2025 10-Q filing.

Shoppers Return, Driving Sales Higher

Dollar General reported a healthy 5.1% increase in net sales, reaching $10.73 billion for the quarter ended August 1, 2025. This growth was supported by new store openings and, more importantly, a 2.8% increase in same-store sales—a metric that tracks performance in stores open for at least 13 months.

Notably, this same-store sales growth was fueled by a 1.5% increase in customer traffic and a 1.2% rise in the average transaction amount. The increase in foot traffic is a positive sign, suggesting that Dollar General's value proposition is resonating with consumers who continue to face a challenging economic environment.

The following flow diagram visualizes how Dollar General's revenue is converted into profit after accounting for its various costs and expenses for the quarter.

The Profitability Tug-of-War

The most interesting part of the report is the dynamic between gross profit and operating expenses.

On one hand, the company achieved a significant improvement in its gross profit margin, which rose by 1.37 percentage points (or 137 basis points) to 31.3%. According to the filing, this was driven primarily by:

• Lower shrink: A reduction in inventory losses from theft, damage, or administrative errors.
• Higher inventory markups: Better initial pricing on products.
• Lower inventory damages: Improved handling and management of goods.

These are significant operational wins, indicating better control over inventory and pricing strategy.

However, this gain was nearly offset by rising Selling, General & Administrative (SG&A) expenses. As a percentage of sales, SG&A increased by 1.21 percentage points (121 basis points) to 25.8%. The main culprits were higher costs for incentive compensation, store repairs and maintenance, and employee benefits.

This tug-of-war left the operating profit margin only slightly higher at 5.55%, an improvement of just 0.16 percentage points over the same period last year.

A Focus on Financial Discipline

Reinforcing the theme of operational control, Dollar General has successfully managed its inventory levels. On a per-store basis, inventories at the end of the quarter were down 7.4% compared to the prior year. This leaner inventory position can lead to fewer markdowns and better cash flow.

The company is also showing capital discipline. It confirmed its plan to not repurchase any shares for the remainder of 2025. This move is intended to preserve its investment-grade credit rating and maintain financial flexibility in a period of economic uncertainty.

Looking Ahead

Dollar General's latest quarter demonstrates a company making real headway in core retail fundamentals like inventory management and margin expansion. However, it also underscores the persistent pressure from rising operational costs that affects the entire retail industry. For a company built on serving a value-focused consumer, the ability to manage these expenses while keeping prices low will remain its central challenge and the key to unlocking further profit growth.