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Dollar General Corporation (DG - Analyst Report), which looks unwilling to relinquish its Family Dollar Stores Inc. (FDO - Analyst Report) bid, came out with second-quarter fiscal 2014 results. Earnings of 83 cents a share met the Zacks Consensus Estimate and rose 7.8% from 77 cents in the year-ago period on the back of growth across the Consumables category. However, the company struggled with lower margins and slower-than-expected comparable-store sales growth.

 

Net sales of this Zacks Rank #3 (Hold) stock increased 7.5% to $4,724 million but fell short of the Zacks Consensus Estimate of $4,761 million. However, the growth rate accelerated sequentially from 6.8% in the first quarter.

Sales in the Consumables category jumped 8.3% to $3,576.2 million; the Seasonal category witnessed a 3.1% rise in sales to $593.6 million, while Home products sales increased 7.5% to $285.4 million. Sales in the Apparel category grew 6.9% to $268.8 million. Consumables category sales continue to improve, primarily buoyed by strong sales of tobacco products, perishables, and candy and snacks.

Higher traffic and average transaction value led to 2.1% growth in comparable-store sales. Management hinted that comps improved significantly in May, rising over 3.5%, but showcased moderate growth in June and July hurt by a competitive retail landscape and cautious consumer spending.

Gross profit increased 5.7% to $1,455.6 million, while gross margin contracted 53 basis points to 30.8% due to higher sales of low margin products like consumables. Moreover, higher markdowns also hampered margins. Adjusted operating profit grew 1.7% to $428.5 million, however, operating margin fell about 52 basis points to 9.1%.

Dollar General has been facing stiff competition from Wal-Mart Stores Inc. (WMT - Analyst Report) and Target Corp. (TGT - Analyst Report). In order to retain its customer base, the company has been offering compelling prices but this has resulted in decreasing margins. With heightening competition, consolidation is now the demand of time in the race of the survival of the fittest. Although Family Dollar rejected the $9.7 billion bid citing difficulty to overcome antitrust regulatory concerns, Dollar General still remains committed to seal the deal.

Other Financial Details

Dollar General ended the quarter with cash and cash equivalents of $172.5 million, long-term obligations of $2,881.2 million and shareholders’ equity of $5,096 million.

The company had incurred $191 million in capital expenditures during the first-half of fiscal 2014. Management projects capital expenditures in the range of $450 million to $500 million for the fiscal year.

The company did not repurchase any shares in the quarter under review. It bought back 14.1 million shares for $800 million during the first half of fiscal 2014. Since the commencement of the share repurchase program in Dec 2011, the company has bought back 44.5 million shares aggregating $2.3 billion. The company still has $223.4 million remaining under its current share repurchase authorization as of Aug 27.

Stores Update

Dollar General opened 426 new outlets and closed 23 stores during the first half of fiscal 2014, thereby bringing the total store count to 11,535. During fiscal 2014, the company plans to open about 700 new stores and relocate or remodel about 500 stores. Further, the company expects to finish about 400 life cycle remodels during the year.

Guidance

Dollar General reiterated its fiscal 2014 earnings forecast between $3.45 and $3.55 per share. The current Zacks Consensus Estimate of $3.51 dovetails with the company’s guidance range.

For fiscal 2014, total sales are expected to rise 8% to 9% year over year, while comparable-store sales are expected to increase 3% to 3.5%, slightly narrower than 3% to 4% projected earlier. Management anticipates square footage to increase about 6% to 7%.

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