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Dollar General (DG) Up 0.2% Since Last Earnings Report: Can It Continue?

Zacks Equity Research

A month has gone by since the last earnings report for Dollar General (DG). Shares have added about 0.2% in that time frame, underperforming 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 the most recent earnings report in order to get a better handle on the important catalysts.

Dollar General Beats on Q3 Earnings, Raises FY19 View

Dollar General Corporation posted better-than-expected third-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.

Let’s Delve Deep

Quarterly earnings came in at $1.42 per share that surpassed the Zacks Consensus Estimate of $1.38 and increased 12.7% 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 third straight quarter of positive earnings surprise.

Net sales of $6,991.4 million increased 8.9% from the prior-year period and came ahead of the Zacks Consensus Estimate of $6,919.4 million for the sixth quarter in row. Contribution from new outlets and same-store sales growth favorably impacted the top line.

Dollar General’s same-store sales increased 4.6% year over year primarily owing to rise in average transaction amount and customer traffic. Consumables, Seasonal, Apparel and Home categories favorably impacted the metric.

Sales in the Consumables category increased 9.2% to $5,523.2 million, while the same in Seasonal category witnessed a rise of 9.2% to $750.8 million. Home Products sales rose 7.8% to $400.9 million, while Apparel category sales grew 5.8% to $316.5 million.

Gross profit advanced 9% to $2,065.1 million, while gross margin remained flat at 29.5%.  Higher initial markups on inventory purchases, a reduction in markdowns as a percentage of net sales, and a lower LIFO provision were offset by higher shrink, increased transportation and distribution expenses, and a higher proportion of sales from Consumables category. Management expects gross margin improvement in the second half to be roughly in line with the second quarter.

Meanwhile, operating income rose 11.1% to $491.4 million, whereas adjusted operating margin increased 14 basis points to 7%.

Store Update

During the 39-week period ended on Nov 1, the company opened 769 new outlets, remodeled 928 stores and relocated 75 stores. In fiscal 2019, the company plans to open 975 new stores, remodel 1,000 stores and relocate 100 stores. In fiscal 2020, the company intends to open 1,000 new stores, remodel 1,500 stores, and relocate 80 stores.

The Company is reaffirmed its plans to execute approximately 2,075 real estate projects in fiscal year 2019 and intends to execute roughly 2,600 real estate projects in fiscal 2020.

Other Financial Details

Dollar General ended the quarter with cash and cash equivalents of $276.1 million, long-term obligations of $2,762.5 million and shareholders’ equity of $6,648.3 million. The company incurred capital expenditures of $518 million during the 39-week period ended on Nov 1. For fiscal 2019, it continues to anticipate capital expenditures in the range of $775-$825 million.

The company bought back 2.5 million shares for $400 million during the quarter under review. At the end of the quarter, it has an outstanding authorization of nearly $561 million. The company recently raised the authorization under the share repurchase program by $1 billion. The company intends to repurchase shares worth $1.2 billion during fiscal 2019.

Outlook

Management now envisions fiscal 2019 adjusted earnings in the band of $6.55-$6.65 per share, the mid-point of which — $6.60 — is above fiscal 2018 reported earnings of $5.97. Dollar General projected net sales growth in the low 8% range with same-store sales expected to increase in the mid-to-high 3% range. The company envisions adjusted operating profit growth of approximately 7-9%.

The company had earlier guided fiscal 2019 earnings in the range of $6.45-$6.60 per share and same-store sales increase of low-to-mid 3% range.  The company had forecast operating profit growth of approximately 6-8%.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended downward during the past month.

VGM Scores

Currently, Dollar General has a nice Growth Score of B, a grade with the same score on the momentum front. Charting a somewhat similar path, 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 B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward 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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