Dollar General (DG) Q3 Earnings Meet, View Cut, Stock Down

Dollar General Corporation (NYSE:DG) reported third-quarter fiscal 2018 results, wherein both the top and bottom line continue to improve year over year. The quarterly earnings came in at $1.26 per share including an estimated 5 cents on account of “Disaster-Related Expenses”. The figure marked a sharp improvement of 35.5% from the prior-year period number of 93 cents and also came in line with the Zacks Consensus Estimate.

The year-over-year increase in the bottom line can be attributed to higher net sales, cost containment efforts, lower effective tax rate and share repurchase activity. Net sales of $6,417.5 million improved 8.7% from the prior-year period and came ahead of the Zacks Consensus Estimate of $6,388 million for the second quarter in row. Contribution from new outlets and comparable-store sales growth favorably impacted the top line.

Despite reporting decent results, shares of this Goodlettsville, Tennessee based company are down roughly 5% during the pre-market trading hours, as investors fretted over view cut. Management trimmed fiscal 2018 earnings outlook citing "greater-than-anticipated expenses" related to hurricanes and higher transportation costs.

Notably, in the past six months, this Zacks Rank #3 (Hold) company has advanced 19% compared with the industry’s increase of 7%.

Let’s Delve Deep

Dollar General’s comparable-store sales increased 2.8% year over year primarily owing to rise in average transaction amount. Consumables, Seasonal and Home categories favorably impacted comparable-store sales, while Apparel category had a negative impact.

Sales in the Consumables category increased 9.4% to $5,058.8 million, while the same in Seasonal category witnessed a rise of 8% to $687.6 million. Home Products sales rose 7.4% to $371.8 million, while Apparel category sales grew 1.3% to $299.2 million.

Gross profit advanced 7.3% to $1,895.1 million, however, gross margin contracted 39 basis points (bps) to 29.5% 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. Meanwhile, operating income rose 5.9% to $442.1 million, however, operating margin contracted 20 basis points to 6.9%.

Store Update

During 39-week period ended on Nov 2, 2018, Dollar General opened 750 new stores, remodeled 925 stores, relocated 92 stores and closed 57 stores. The company ended the period with 15,227 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 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 $260.7 million, long-term obligations of $2,902.4 million and shareholders’ equity of $6,355.9 million. The company incurred capital expenditures of $551 million during the 39-week period ended on Nov 2, 2018. For fiscal 2018, it now anticipates capital expenditures in the range of $725-$775 million compared with the prior projection of $725-$800 million.

The company bought back 2.8 million shares for $298 million during the quarter. Since the commencement of the share repurchase program in December 2011, the company has bought back 87.9 million shares aggregating $5.8 billion.

At the end of the quarter, it has an outstanding authorization of nearly $706 million. The company expects to buy back shares worth of nearly $850 million during the fiscal year.

Outlook

Management now expects fiscal 2018 net sales to increase about 9% with comparable-store sales growth to be in the middle of the prior projected range of mid-to-high two percent. The company had earlier guided net sales growth in the range of 9-9.3%. The company now expects operating margin to be modestly below the prior year.

Dollar General now envisions earnings in the band of $5.85-$6.05 per share down from the earlier estimate of $5.95-$6.15. The Zacks Consensus Estimate for fiscal 2018 is currently pegged at $6.11.

The company continues to envisions a cash benefit of roughly $300 million in fiscal 2018 on account of Tax Cuts and Jobs Act.

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