(Reuters) - Dollar General Corp (NYSE:DG) forecast 2019 profit below analysts' expectations on Thursday as the discount retailer ramps up spending on stores to pull in more customers, sending its shares down more than 7 percent.
As competition heats up in the grocery space with the entry of more online businesses, the company said it would spend about $50 million to improve distribution of fresh and frozen food, shopping convenience and labor productivity.
"Looking ahead, there are some threats on the horizon, rising costs foremost among them," Neil Saunders, managing director of retail research firm GlobalData Retail.
Dollar General also plans to open 975 new stores and remodel 1,000 old ones. Last year, its remodeling focused on adding more refrigeration units and private label brands at its stores, which Saunders said, will drive sales.
"These (initiatives) should help offset the deteriorating cost environment. Even so, we believe profit as a proportion of revenue may slip as sales of lower margin perishables increases," he said.
Dollar General said it expects to earn $6.30 to $6.50 per share in fiscal 2019, below the average analyst estimate of $6.65, according to IBES data from Refinitiv.
Excluding items, the company earned $1.84 per share in the fourth quarter ended Feb. 1 but missed the average analyst estimate of $1.88, blaming higher transportation cost and lower sales of high-margin products.
However, the company's same-store sales rose 4 percent and beat the 2.6 percent increase analysts had estimated, as its customers, who benefited from an earlier-than-usual distribution of food stamps, spent more on groceries.
Net sales rose 8.5 percent to $6.65 billion and beat analysts' expectations of $6.61 billion.
Shares were trading down at $112 before the opening bell, despite the company raising its quarterly dividend by 10 percent and increasing its share buyback program by $1 billion.
Rival Dollar Tree (NASDAQ:DLTR) Inc's shares were down 1.31 percent. The company last week reported better-than-expected same-store sales, but wrote down the value of its Family Dollar chain by $2.7 billion after years of stagnating sales.