U.S. discount retailer Dollar General Corp (DG.N) reported better-than-expected quarterly sales and said it would raise wages for store managers, replicating similar moves by larger retailers such as Wal-Mart (WMT.N).
The dollar store chain said on Thursday it would hike compensation and provide more training for its store managers, a strategy that it hopes will improve service quality in stores over time but will pressure earnings this year.
Wal-Mart in 2015 had said it would spend $2.7 billion on wages and training, a move it said has helped improve service quality and boost sales.
A tight labor market and rule changes related to overtime pay have made other retailers raise wages as well.
Dollar General said stores where it had already introduced pay hikes for managers had seen higher sales and greater employee retention.
The moves come as Dollar General and larger rival Dollar Tree Inc (DLTR.O) face stiff competition from Wal-Mart and other grocery retailers, which have been discounting aggressively, even amid falling food prices, to win customers.
"We don't see a further (price reduction) needed because we are priced very, very aggressively in most of our areas today, if not all," Dollar General Chief Executive Todd Vasos said on a post-earnings call with analysts.
The company said it had slashed prices on about 450 best-selling products in less than a fifth of its stores starting in mid-2016, which helped lift sales.
"They are doing the right thing ... they are not going to be the low-price leader, but they're going to be in a range that is acceptable to their customer that doesn't cause them to lose to the competition," said Edward Jones analyst Brian Yarbrough.
Dollar General's sales rose 13.7 percent to $6.01 billion in the fourth quarter ended Feb. 3, helped by higher average spending at its stores, even as store traffic declined slightly.
Analysts had expected sales of $5.97 billion, according to Thomson Reuters I/B/E/S.
The Goodlettsville, Tennessee-based company said it expects earnings of $4.25 to $4.50 per share for the year ending Feb. 2, 2018, largely below the average analyst estimate of $4.39.
The forecast includes about $70 million earmarked mainly for the wage hikes.
Net income rose 10 percent to $414.2 million or $1.49 per share in the quarter, beating the average estimate of $1.41.
Dollar General's shares were up 3 percent at $74.96 in midday trading. Up to Wednesday's close, they had fallen 1.7 percent this year.
(Reporting by Sruthi Ramakrishnan in Bengaluru; Editing by Sai Sachin Ravikumar)