Back to top

Image: Bigstock

Dollar General (DG) Up 3.5% Since Last Earnings Report: Can It Continue?

Read MoreHide Full Article

It has been about a month since the last earnings report for Dollar General (DG - Free Report) . Shares have added about 3.5% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Dollar General due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Dollar General Q3 Earnings & Sales Rise Y/Y, View Cut

Dollar General Corporation posted third-quarter fiscal 2018 results, wherein both the top and bottom lines continue to improve year over year. The quarterly earnings came in at $1.26 per share including an estimated 5 cents on account of “Disaster-Related Expenses”. The figure marked a sharp improvement of 35.5% from the prior-year period number of 93 cents and also came in line with the Zacks Consensus Estimate.

The year-over-year increase in the bottom line can be attributed to higher net sales, cost containment efforts, lower effective tax rate and share repurchase activity. Net sales of $6,417.5 million improved 8.7% from the prior-year period and came ahead of the Zacks Consensus Estimate of $6,388 million for the second quarter in row. Contribution from new outlets and comparable-store sales growth favorably impacted the top line.

Despite reporting decent results, management trimmed fiscal 2018 earnings outlook citing "greater-than-anticipated expenses" related to hurricanes and higher transportation costs.

Let’s Delve Deep

Dollar General’s comparable-store sales increased 2.8% year over year primarily owing to rise in average transaction amount. Consumables, Seasonal and Home categories favorably impacted comparable-store sales, while Apparel category had a negative impact.

Sales in the Consumables category increased 9.4% to $5,058.8 million, while the same in Seasonal category witnessed a rise of 8% to $687.6 million. Home Products sales rose 7.4% to $371.8 million, while Apparel category sales grew 1.3% to $299.2 million.

Gross profit advanced 7.3% to $1,895.1 million, however, gross margin contracted 39 basis points (bps) to 29.5% owing to sales of products carrying lower margin, increased markdowns and higher transportation costs. A higher proportion of sales came from Consumables. These were partly offset by an improved rate of inventory shrink. Meanwhile, operating income rose 5.9% to $442.1 million, however, operating margin contracted 20 basis points to 6.9%.

Store Update

During 39-week period ended on Nov 2, 2018, Dollar General opened 750 new stores, remodeled 925 stores (of these 359 remodeled into the Dollar General Traditional Plus format or DGTP), relocated 92 stores and closed 57 stores. The company introduced a fresh produce section in 107 of these DGTP remodels. The company ended the period with 15,227 stores. The company maintained its plans to open about 900 new stores, remodel 1,000 stores and relocate 100 stores during the fiscal year.

During fiscal 2019, the company plans to open about 975 new stores (of these approximately 10 stores will be in the DGX format), remodel 1,000 stores and relocate 100 stores. Of the planned remodels, the company plans to convert approximately 500 stores in the DGTP format. It will add fresh produce section to approximately 200 of these stores.

Other Financial Details

Dollar General ended the quarter with cash and cash equivalents of $260.7 million, long-term obligations of $2,902.4 million and shareholders’ equity of $6,355.9 million. The company incurred capital expenditures of $551 million during the 39-week period ended on Nov 2, 2018. For fiscal 2018, it now anticipates capital expenditures in the range of $725-$775 million compared with the prior projection of $725-$800 million.

The company bought back 2.8 million shares for $298 million during the quarter. Since the commencement of the share repurchase program in December 2011, the company has bought back 87.9 million shares aggregating $5.8 billion.

At the end of the quarter, it has an outstanding authorization of nearly $706 million. The company expects to buy back shares worth of nearly $850 million during the fiscal year.

Outlook

Management now expects fiscal 2018 net sales to increase about 9% with comparable-store sales growth to be in the middle of the prior projected range of mid-to-high two percent. The company had earlier guided net sales growth in the range of 9-9.3%. The company now expects operating margin to be modestly below the prior year. Dollar General now envisions earnings in the band of $5.85-$6.05 per share down from the earlier estimate of $5.95-$6.15. The company continues to envisions a cash benefit of roughly $300 million in fiscal 2018 on account of Tax Cuts and Jobs Act.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -5.21% due to these changes.

VGM Scores

Currently, Dollar General has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Dollar General has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


See More Zacks Research for These Tickers


Normally $25 each - click below to receive one report FREE:


Dollar General Corporation (DG) - free report >>

Published in