Dollar General (DG) Lags Q2 Earnings & Sales; Stock Falls

Dollar General Corporation (NYSE:DG) succumbed to negative earnings surprise in the second-quarter of fiscal 2016, after beating the Zacks Consensus Estimate in the trailing four quarters. The company posted quarterly earnings of $1.08 per share that missed the Zacks Consensus Estimate by a penny but was up 13.7% from the year-ago period.

Net sales came in at $5,391.9 million that was an increase of 5.8% from the prior-year quarter. However, net sales came below the Zacks Consensus Estimate of $5,491 million, thus marking the 12th straight quarter of revenue miss. Following, the results, the company’s shares are down nearly 8% during pre-market trading session.

Increase in average transaction value led to 0.7% growth in comparable-store sales. While strength was witnessed in the consumables category, comparable store sales in the seasonal category were flat year over year, but it declined in apparel and home categories.

Sales in the Consumables category jumped 6.4% to $4,116.5 million, while the Seasonal category witnessed a 4.9% rise in sales to $674 million. Home products sales increased 3.7% to $315.6 million and Apparel category sales grew 1.6% to $285.9 million.

Gross profit increased 5.9% to $1,681.8 million, while gross margin expanded 2 basis points to 31.2% due to rise in initial inventory markups and decline in transportation costs on account of lower fuel rates partially offset by increase in sales of consumables category, which carries lower gross profit rate compared with non-consumables category higher inventory shrinkage, and increased markdowns.

Operating profit grew 7% to $509.1 million, whereas operating margin increased 10 basis points to 9.4%.

Other Financial Details

Dollar General ended the quarter with cash and cash equivalents of $185 million, long-term obligations of $2,556.5 million and shareholders’ equity of $5,413.4 million. During the first half of fiscal 2016, the company incurred capital expenditures of $268 million.

The company bought back 2.5 million shares during the second quarter of fiscal 2016. Since the commencement of the share repurchase program in Dec 2011, the company has bought back 67.3 million shares aggregating $4.0 billion. On Aug 24, 2016, the company announced an additional share repurchase program of $1 billion, thereby increasing the share repurchases authorization to nearly $1.4 billion.

Store Update

Dollar General opened 510 new outlets and remodeled/relocated 594 outlets during the first half of fiscal 2016. As per the company’s long term growth model provided on Mar 10, 2016, the company plans to open about 900 new stores, and relocate or remodel around 875 stores during fiscal 2016. During fiscal 2017, the company plans to open about 1,000 stores and remodel or relocate approximately 900 stores. As of Aug 13, 2016, Dollar General operated 13,000 stores across 43 states.

Outlook

Dollar General Corporation offers a sound investment opportunity and looks firmly set with regard to its financial growth model. The company repeated its long term growth model which was provided on Mar 10, 2016. The company’s goal is to enhance shareholder returns – via earnings per share growth and dividend yield – by 11–17%.

Dollar General’s model includes earnings per share annual growth target of 10–15% and net sales increase of 7–10%, including square footage growth of 6–8% and comparable-store sales growth of 2–4%. Operating profit is expected to improve 7–11%. Management anticipates cash from operations to be 7–8% of sales. It also estimates capital expenditures to be 2–3% of sales.

However, the company updated its capital expenditure guidance. The company expects capital expenditure in the range of $580 million to $630 million – up from the previous guidance of $550 million to $600 million. Increase in capital expenditure was due to purchase of 42 Walmart (NYSE:WMT) Express stores.

Zacks Rank

Dollar General currently carries a Zacks Rank #3 (Hold). Better-ranked stocks in the retail sector include Burlington Stores, Inc. (NYSE:BURL) and The Children's Place, Inc. (NASDAQ:PLCE) , both sporting a Zacks Rank #1 (Strong Buy). Ross Stores Inc. (NASDAQ:ROST) holds a Zacks Rank #2 (Buy).