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

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A month has gone by 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 drivers.

Dollar General Q2 Earnings & Sales Beat, Rises Y-o-Y

After witnessing a negative earnings surprise of 2.9% during the first quarter of fiscal 2018, Dollar General Corporation posted 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.

Let’s Introspect

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%.

Store Update

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. During the quarter, the company opened 241 stores, remodeled 322 stores and relocated 31 stores. Of the remodeled stores, 121 were remodeled in the Dollar General Traditional Plus format.

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.

Outlook

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 company continues to envisions fiscal 2018 operating margin rate to be almost flat year over year at 8.6%.

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.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

Currently, Dollar General has a strong Growth Score of A, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. 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 this revision looks promising. Notably, Dollar General has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.




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