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Sturdy Comps to Fuel Dollar General (DG), SG&A Costs a Woe

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Dollar General Corporation’s (DG - Free Report) solid prospects, brand recognition and earnings outlook bode well for the stock. The company’s commitment toward better pricing, private label offering, effective inventory management, and merchandise and operational initiatives should drive sales and margins. These along with a compelling store growth story at convenient locations and focus on consumable products provide the company an edge over competitors.

Increased focus on the consumables category, a significant contributor to sales, is likely to help drive traffic and comparable-store sales improvement by endorsing itself as a one-stop shopping destination for necessary items. Increased set-up of cooler facilities to boost the sale of perishable items is likely to drive trips and basket size. The digital coupon program and DG Go app will also in all probability increase conversion rate.

Dollar General’s comparable-store sales growth story is remarkable. Fiscal 2017 marked the 28th consecutive year of comparable-store sales growth for the company. The trend was maintained in the first quarter of fiscal 2018, with comps rising 2.1% on increased transactions. Consumables provided a major boost.

Management anticipates net sales for fiscal 2018 to increase by 9% year on year. Further, earnings for the fiscal are envisioned in the range of $5.95-$6.15 per share, up from $4.49 in fiscal 2017.

The company has adopted a disciplined approach to store openings, expansion and refurbishment. It plans to open 900 stores, remodel 1,000 and relocate approximately 100 in fiscal 2018. Of the planned remodels, roughly 400 locations are likely to be upgraded to Dollar General Traditional Plus format with a higher cooler count. This is likely to lift comparable sales by 10-15%. Moreover, the company is focusing on smaller format stores that require less capital expenditure and help cope with space constraint.

As Dollar General is committed toward ramping up investments in store expansion, cost hurdles associated with the same is a threat to margins. SG&A expenses, as a percentage of sales, have been on the rise due to elevated retail labor, occupancy and utility costs. During the first quarter, Dollar General’s SG&A expenses, as a percentage of sales, rose 60 basis points to 22.4%, which also impacted operating margin.

We note that shares of this Zacks Rank #3 (Hold) company have surged 42% in a year, almost in line with the industry.

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