GOODLETTSVILLE, Tenn. — Whether it is revolutionary or evolutionary in nature, there is something exciting happening at Dollar General Corp. The nation’s largest retailer by store count is redefining extreme-value retailing in a way that will challenge all small-box retailers.

Whether it is revolutionary or evolutionary in nature, there is something exciting happening at Dollar General Corp. The nation’s largest retailer by store count is redefining extreme-value retailing in a way that will challenge all small-box retailers.

The channel has, of course, been evolving over the past decade away from the old model of offering factory closeouts and remainders combined with a shifting assortment of off brands.

But after Kohlberg Kravis Roberts & Co. acquired Dollar General in 2007 and hired Rick Dreiling, who most recently had been chief executive officer of Duane Reade Inc., to be CEO and then chairman as well, the chain’s transformation quickly accelerated.

In essence, Dollar General is creating something new by harkening back to something very old, something like the general store of our grandparents’ and great-grandparents’ day. At the same time, what the retailer is doing clearly resonates with contemporary shoppers, as demonstrated by its financial performance in fiscal 2009.

Despite the severely challenged economy last year, Dollar General’s sales grew 12.8% to a record $11.80 billion. In a year when most retailers were elated to eke out a 2% or 3% rise in same-store sales, Dollar General posted a 9.5% increase — on top of 9% growth the year before. Sales per square foot, which Dreiling refers to as his favorite figure, grew from $166 to $195 in just under two years, thanks largely to the installation of 78-inch-high gondolas that have increased the stores’ sales productivity.

“We can look at discount retailing and take whatever percentage of our same-store sales we want and attribute it to the economy,” says Dreiling with understandable pride. “And if we apply that to everybody, we still have by far industry-leading same-store sales growth.”

Gross margin, a key metric for a healthy bottom line, expanded by 201 basis points to 31.3%, and operating profit grew 64% to $953 million. Setting aside certain charges related to the company’s initial public offering last November, adjusted net income skyrocketed 200% to $425 million. While most retailers have been happy with any uptick at all in their top- and bottom-line results, Dollar General posted those double- and triple-digit increases on top of impressive growth in 2008.

Of course, like some but certainly not all other discounters, Dollar General has benefited from a recession that has forced consumers to look hard for the best bargains available. A year ago Nielsen Co. unveiled research that showed consumers at all income levels shopping more at dollar stores, with high-income shoppers spending 18% more, year over year, at dollar outlets.

Dollar General has obviously gotten its share of that business. But the exciting thing, says Dreiling, is that the retailer’s performance is sustainable not just because of “the new consumerism” but because the company has created a new format it calls the customer-centric store, which it already knows will appeal to a wide range of demographics.

Not only has Dollar General expanded its share of wallet among its core customers — those with household annual incomes below $40,000 — by 13%, but its fastest-growing customer segment is consumers with incomes above $70,000. Moreover, in recent surveys 97% of those new customers said they would continue to shop at Dollar General no matter what the economy does, the same percentage as among the chain’s core shoppers. “In all my years in retailing I’ve never seen that,” Dreiling admits.

He attributes that willingness to stick with Dollar General to the changes implemented thus far: radical improvements in store standards and a radical transformation of the product assortment. An upgraded and highly disciplined category management process has created a powerful blend of major national brands with restaged store brands.

“The commitment we’ve made to national brands is providing us legitimacy with the trade-down consumer,” Dreiling explains. “What Dollar General can get credit for is doing a better job of understanding its customers and getting those changes in front of them at an accelerated pace.”

Soon after Dreiling arrived in January 2008, he unveiled four key operating priorities that continue to chart a steady course for the chain: driving productive sales, increasing gross margin, leveraging process improvements and information technology to reduce costs, and strengthening and expanding Dollar General’s culture of serving others.

He also brought in proven leaders from a variety of other retail backgrounds to work with Dollar General veterans, including Kathleen Guion, who had arrived in 2003 and had already achieved notable improvements in field operations and store standards; chief financial officer David Tehle; and general counsel Susan Lanigan.

Among Dreiling’s key appointments are Todd Vasos, chief merchant; John Flanigan, like Dreiling a veteran of both the supermarket and chain drug business, to head up logistics and the supply chain; and Bob Ravener as chief people officer. It is this management team, presented in the following pages, and the energized 80,000 employees whom they lead, who have executed the transformation of Dollar General with such astounding speed and impact.

“The exciting thing about our company is that it’s a magnificent mix of Dollar General veterans and new people,” says Dreiling. “That’s incredibly important, because there are a lot of people here who helped build this company.”

One certainty is that more growth is on the way. With 600 new stores and 500 remodels and relocations planned for this year, the new format will be in 1,500 stores by year-end. And management is now ready, Dreiling says, to pursue the significant opportunities for growth that have been identified. The next chapter in the story of this remarkable retailer is just unfolding.