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Why Is Dollar General (DG) Up 2.5% Since Last Earnings Report?

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A month has gone by since the last earnings report for Dollar General (DG - Free Report) . Shares have added about 2.5% 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 Beats on Q2 Earnings, Raises View

Dollar General Corporation reported better-than-expected second-quarter fiscal 2019 results, wherein both the top and the bottom line continued to improve year over year. Also, the company witnessed sturdy same-store sales performance.

Impressive performance prompted this Goodlettsville, Tennessee based company to raise fiscal 2019 view. Management informed that the guidance “includes the anticipated impact of increased tariff rates on certain products imported from China.”

Let’s Delve Deep

Adjusted earnings came in at $1.74 per share that surpassed the Zacks Consensus Estimate of $1.58 and increased 14.5% from the prior-year period. The year-over-year increase in the bottom line can be attributed to higher net sales, cost containment efforts and share repurchase activity. Notably, this was the second straight quarter of positive earnings surprise.

Net sales of $6,981.8 million increased 8.4% from the prior-year period and came ahead of the Zacks Consensus Estimate of $6,890 million for the fifth quarter in row. Contribution from new outlets and same-store sales growth favorably impacted the top line.

Dollar General’s same-store sales increased 4% year over year primarily owing to rise in average transaction amount and customer traffic. Consumables, Seasonal and Home categories favorably impacted the metric, while Apparel category had a negative impact on the same.

Sales in the Consumables category increased 8.8% to $5,428 million, while the same in Seasonal category witnessed a rise of 7.8% to $854.1 million. Home Products sales rose 8.7% to $375.1 million, while Apparel category sales grew 2.2% to $324.6 million.

Gross profit advanced 8.8% to $2,148.9 million, while gross margin expanded 13 basis points (bps) to 30.8% owing to fall in markdowns as a percentage of net sales and higher initial markups on inventory purchases. These were partly offset by higher shrink, increased distribution costs, and a higher proportion of sales from Consumables category.

Meanwhile, adjusted operating income rose 11.6% to $608.8 million, whereas adjusted operating margin increased 20 basis points to 8.7%.

Store Update

During the 26-week period ended on Aug 2, the company opened 489 new outlets, remodeled 653 stores and relocated 46 stores. In fiscal 2019, the company plans to open about 975 new stores, remodel 1,000 stores and relocate 100 stores.

Other Financial Details

Dollar General ended the quarter with cash and cash equivalents of $259.6 million, long-term obligations of $2,573.5 million and shareholders’ equity of $6,749.2 million. The company incurred capital expenditures of $293 million during the 26-week period ended on Aug 2. For fiscal 2019, it continues to anticipate capital expenditures in the range of $775-$825 million.

The company bought back 1.4 million shares for $185 million during the quarter under review. At the end of the quarter, it has an outstanding authorization of nearly $961 million. The company intends to buyback shares worth $1 billion during fiscal 2019.

Outlook

Management now envisions fiscal 2019 adjusted earnings in the band of $6.45-$6.60 per share. We note that the company’s guidance is above fiscal 2018 reported earnings of $5.97 per share.

Dollar General projected net sales growth of 8% with same-store sales expected to increase in the low-to-mid 3% range. The company envisions adjusted operating profit growth of approximately 6-8%.

Dollar General had earlier guided fiscal 2019 earnings in the range of $6.30-$6.50 per share, net sales growth of 7% and same-store sales increase of approximately 2.5%.  The company had forecast operating profit growth of approximately 4-6%.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in estimates revision.

VGM Scores

At this time, Dollar General has a nice Growth Score of B, however its Momentum Score is doing a bit better with an A. However, 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 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 upward for the stock, and the magnitude of these revisions has been net zero. 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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