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Dollar General Delivers Strong Q4 Earnings By Copying Wal-Mart

Joseph Lu

Dollar General Corporation. DG, the U.S discount retailer, delivered better-than-expected earnings in the fourth quarter of 2016 by following in the footstep of the America’s largest retail giant, Wal-Mart WMT.

Dollar General posted earnings of $1.49 per share and revenues of $6 billion, beating the Zacks Consensus earnings estimates of $1.41 per share and $5.9 billion in revenues.

The result came as a surprise for us at Zacks. The discount retailer missed the two previous quarterly earnings estimates and three revenuesestimates. Furthermore, the company was underperforming in the Zacks categorized Retail-Discounted & Variety industry. Dollar general’s stock declined 14%, while the industry only lost 3.4%. The industry includes Burlington Stores BURL, Costco Wholesale COST, Target Corp. TGT and Dollar Tree DLTR.

What Changed?

Dollar General has been focusing on raising wages and training programs for store managers.

“To strengthen our position for the long term, we are making significant investments, primarily in compensation and training for our store managers given the critical role this position plays in our customer experience, as well as strategic initiatives,” said Todd Vasos, CEO of Dollar General.

Wal-Mart did the same in 2015, and said it had helped improve service quality and boost sales.

Dollar General said there have already been successful examples. Stores with raised wages introduced had seen higher sales and greater employee retention.

It was a right direction for the discount retailer, as the company faces stiff competition from big retailers like Wal-Mart and other grocery retailers, which have been discounting aggressively to win customers. For Dollar General, further price reduction wasn’t a viable solution because their products were already priced so low.

"We don't see a further (price reduction) needed because we are priced very, very aggressively in most of our areas today, if not all," Vasos said on a post-earnings call with analysts.

Bottom Line

The Tennessee-based retailer posted a 13.7% growth in fourth quarter net sales and fiscal year net sales increased 7.9% to $22 billion.

For 2017, the company looks to continue investing in employee training and open up 1,000 new stores while relocating or remodeling 900 stores.

“While these investments are expected to put pressure on our 2017 earnings, we believe they will strengthen our market share position over time and are positive steps to further support sustainable growth for our shareholders over the long term," said Vasos.

Dollar General is trading at  $73.19 per share with a slight upward movement of 0.5%.  The company also moved up to Zacks Rank #3 (Hold) from a Zacks Rank #4 (Sell) after its earnings report was released on Wednesdays.

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Wal-Mart Stores, Inc. (WMT): Free Stock Analysis Report
Dollar Tree, Inc. (DLTR): Free Stock Analysis Report
Dollar General Corporation (DG): Free Stock Analysis Report
Target Corporation (TGT): Free Stock Analysis Report
Costco Wholesale Corporation (COST): Free Stock Analysis Report
Burlington Stores, Inc. (BURL): Free Stock Analysis Report
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