After witnessing a negative earnings surprise of 2.9% during the first quarter of fiscal 2018, Dollar General Corporation (DG - Free Report) delivered an earnings beat in the second quarter. Net sales also surpassed the Zacks Consensus Estimate, after missing the same in the preceding two quarters. Even both the top and bottom lines continue to improve year over year. The company updated its fiscal 2018 sales projection but kept earnings view intact.
Notably, in the past three months, this Zacks Rank #3 (Hold) company has advanced 22% compared with the industry’s increase of 18%.
In the quarter under review, earnings came in at $1.52 per share surpassing the consensus mark of $1.49, and improving approximately 38% from the year-ago period. The year-over-year increase in the bottom line can be attributed to higher net sales, cost containment efforts and share repurchase activity.
Net sales of $6,443.3 million improved 10.6% from the prior-year quarter and came ahead of the Zacks Consensus Estimate of $6,370.5 million. Contribution from new outlets and comparable-store sales growth favorably impacted the top line.
Dollar General’s comparable-store sales increased 3.7% year over year primarily owing to rise in average transaction amount and customer traffic. Consumables, Seasonal and Apparel categories provided a boost to the comparable-store sales, while Home category had a negative impact.
Sales in the Consumables category increased 11.2% to $4,988.1 million, while the same in Seasonal category witnessed a rise of 10.4% to $792.5 million. Home Products sales rose 5.3% to $345.2 million, while Apparel category sales grew 6.5% to $317.6 million.
Gross profit advanced 10.3% to $1,974.9 million, however, gross margin contracted 7 basis points (bps) to 30.7% 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 and higher initial markups on inventory purchases.
Meanwhile, operating income rose 10.6% to $545.5 million, operating margin remained almost flat at 8.5%.
During 26-week period ended on Aug 3, 2018, Dollar General opened 510 new stores, remodeled 643 stores, relocated 67 stores and closed 29 stores. The company ended the period with 15,015 stores. The company maintained its plans to open about 900 new stores, remodel 1,000 stores and relocate 100 stores during the fiscal year.
Other Financial Details
Dollar General ended the quarter with cash and cash equivalents of $265.3 million, long-term obligations of $2,776.8 million and shareholders’ equity of $6,378.9 million. The company incurred capital expenditures of $371 million during the 26-week period ended on Aug 3, 2018. For fiscal 2018, it continues to anticipate capital expenditures in the range of $725-$800 million.
The company bought back 2.1 million shares for $200 million during the quarter. Since the commencement of the share repurchase program in December 2011, the company has bought back 85.1 million shares aggregating $5.5 billion.
At the end of the quarter, it has an outstanding authorization of nearly $1 billion. The company reiterated its expectation of share buyback of roughly $850 million for the fiscal year.
Management now expects net sales growth to be in the range of 9-9.3% with comparable-store sales increase in mid-to-high two percent range during fiscal 2018. The company had earlier guided net sales growth of 9% with comparable-store sales increase in mid-two percent range.
Dollar General reiterated full year earnings view of $5.95-$6.15 per share. The Zacks Consensus Estimate for fiscal 2018 is currently pegged at $6.06.
The company continues to envisions a cash benefit of roughly $300 million in fiscal 2018 on account of Tax Cuts and Jobs Act enacted in December 2017.
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