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Dollar General ((DG - Free Report) ) delivered a mixed Q3 earnings report last Thursday and I wanted to provide an update after my colleague Derek Lewis reported on the company's downward earnings trend last month.
In mid-November, Derek wrote "Analysts have taken a bearish stance on the company’s earnings outlook, with expectations decreasing across all timeframes over the last several months. Negative earnings estimate revisions from analysts and crunched profitability paint a challenging picture for the company’s shares in the near term."
Further Deterioration
Q3 earnings came in at $1.26 per share, which beat the Zacks Consensus Estimate of $1.19 per share but decreased 45.9% from the prior-year period.
Net sales of $9,694.1 million rose 2.4% from the prior-year period on sales contributions from new stores, partly offset by a fall in same-store sales and the impact of store closures. The top line came in $48 million, or half a percent, ahead of the Zacks Consensus Estimate of $9,646 million.
Dollar General’s same-store sales fell 1.3% year over year, owing to a lower average transaction amount, partly offset by an increase in customer traffic. Same-store sales reflected declines in the home, seasonal, consumable and apparel categories.
Sales increased 3.6% year over year to $ 7,940.5 million for Consumables. However, sales declined 0.2% to $940.6 million for Seasonal, 7% to $534.5 million for Home Products and 1.5% to $278.5 million for the Apparel category.
Gross profit dipped 2.5% to $2,812.5 million in the reported quarter and the gross margin decreased 147 basis points to 29%. The decline in the gross margin can be attributed to lower inventory markups, increased shrink and higher markdowns, partly offset by a lower LIFO provision and decreased transportation costs.
General Outlook
The company has been taking actions to accelerate the pace of inventory-reduction efforts and additional investments in planned areas like retail labor to elevate the in-store experience.
For fiscal 2023 (ends January), management now projects net sales growth to be in the band of 1.5-2.5% versus the previous expectation of 1.3-3.3%. This includes a negative impact of about two percentage points owing to the lapping fiscal 2022 53rd week. Same-store sales growth is likely to come in the range of a decline of about 1% to flat against the previous guidance range of a 1% decline to 1% growth.
For fiscal 2023, the company now expects earnings per share to be $7.10-$7.60 or a decrease of 29-34% versus the prior expectation of about a 22-34% decline. This view includes the adverse impact of nearly four percentage points owing to higher interest expense.
After the report, analysts have taken down sales and profit estimates further, likely keeping DG in the doghouse of the Zacks Rank. Current FY23 consensus is now $7.42, representing a 30.5% annual decline and next year looks to only grow 2% from there.
Store Update
In the third quarter of fiscal 2023, Dollar General opened 263 stores, remodeled 545 stores and relocated 44 stores. In fiscal 2024 (begins in February), the company anticipates carrying out 2,385 real estate projects, including 800 store openings, 1,500 remodels and 85 store relocations.
The company still sees an opportunity to open about 12,000 more stores in the US over the next several years. But given increased capital and construction costs, the pace is slowing versus the 990 store openings in 2023.
Bottom Line on the General
After reaching for 3-month highs near $140, DG shares were rejected post-earnings. That will likely prove resistance until next quarter since it was also the site of the last earnings gap down in late August.
DG may prove to be a value stock again at some point -- it currently trades at an attractive price/sales ratio of 0.7 on about $40 billion in revenues. But we'll need to see a turnaround in the next quarter or two. The Zacks Rank will let you know.
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Bear of the Day: Dollar General (DG)
Dollar General ((DG - Free Report) ) delivered a mixed Q3 earnings report last Thursday and I wanted to provide an update after my colleague Derek Lewis reported on the company's downward earnings trend last month.
In mid-November, Derek wrote "Analysts have taken a bearish stance on the company’s earnings outlook, with expectations decreasing across all timeframes over the last several months. Negative earnings estimate revisions from analysts and crunched profitability paint a challenging picture for the company’s shares in the near term."
Further Deterioration
Q3 earnings came in at $1.26 per share, which beat the Zacks Consensus Estimate of $1.19 per share but decreased 45.9% from the prior-year period.
Net sales of $9,694.1 million rose 2.4% from the prior-year period on sales contributions from new stores, partly offset by a fall in same-store sales and the impact of store closures. The top line came in $48 million, or half a percent, ahead of the Zacks Consensus Estimate of $9,646 million.
Dollar General’s same-store sales fell 1.3% year over year, owing to a lower average transaction amount, partly offset by an increase in customer traffic. Same-store sales reflected declines in the home, seasonal, consumable and apparel categories.
Sales increased 3.6% year over year to $ 7,940.5 million for Consumables. However, sales declined 0.2% to $940.6 million for Seasonal, 7% to $534.5 million for Home Products and 1.5% to $278.5 million for the Apparel category.
Gross profit dipped 2.5% to $2,812.5 million in the reported quarter and the gross margin decreased 147 basis points to 29%. The decline in the gross margin can be attributed to lower inventory markups, increased shrink and higher markdowns, partly offset by a lower LIFO provision and decreased transportation costs.
General Outlook
The company has been taking actions to accelerate the pace of inventory-reduction efforts and additional investments in planned areas like retail labor to elevate the in-store experience.
For fiscal 2023 (ends January), management now projects net sales growth to be in the band of 1.5-2.5% versus the previous expectation of 1.3-3.3%. This includes a negative impact of about two percentage points owing to the lapping fiscal 2022 53rd week. Same-store sales growth is likely to come in the range of a decline of about 1% to flat against the previous guidance range of a 1% decline to 1% growth.
For fiscal 2023, the company now expects earnings per share to be $7.10-$7.60 or a decrease of 29-34% versus the prior expectation of about a 22-34% decline. This view includes the adverse impact of nearly four percentage points owing to higher interest expense.
After the report, analysts have taken down sales and profit estimates further, likely keeping DG in the doghouse of the Zacks Rank. Current FY23 consensus is now $7.42, representing a 30.5% annual decline and next year looks to only grow 2% from there.
Store Update
In the third quarter of fiscal 2023, Dollar General opened 263 stores, remodeled 545 stores and relocated 44 stores. In fiscal 2024 (begins in February), the company anticipates carrying out 2,385 real estate projects, including 800 store openings, 1,500 remodels and 85 store relocations.
The company still sees an opportunity to open about 12,000 more stores in the US over the next several years. But given increased capital and construction costs, the pace is slowing versus the 990 store openings in 2023.
Bottom Line on the General
After reaching for 3-month highs near $140, DG shares were rejected post-earnings. That will likely prove resistance until next quarter since it was also the site of the last earnings gap down in late August.
DG may prove to be a value stock again at some point -- it currently trades at an attractive price/sales ratio of 0.7 on about $40 billion in revenues. But we'll need to see a turnaround in the next quarter or two. The Zacks Rank will let you know.