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Dollar General (DG) Stock Falls Despite Q2 Earnings Beat

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In spite of a challenging operating environment, Dollar General Corporation DG reported better-than-expected second-quarter results. However, both the top and the bottom lines declined year over year, hurting investor sentiment. Even management’s commentary that it is updating fiscal 2021 view as a result of sturdy performance in the first half of the fiscal failed to lift the spirit. We also note that the company projected lower-than-expected profit for the fiscal year. Shares of Dollar General fell more than 4% during the pre-market trading hours on Aug 26.

Let’s Delve Deep

Quarterly earnings came in at $2.69 per share that handily beat the Zacks Consensus Estimate of $2.59 but declined sharply from $3.12 reported in the prior-year period.

Net sales of $8,650.2 million decreased marginally by 0.4% from the prior-year period owing to the impact of store closures and decline in same-store sales, partly offset by positive contributions from new stores. The top line surpassed the Zacks Consensus Estimate of $8,572 million.

Dollar General’s same-store sales fell 4.7% year over year, thanks to lower customer traffic, partly offset by rise in average transaction amount.

Dollar General Corporation Price, Consensus and EPS Surprise

Dollar General Corporation Price, Consensus and EPS Surprise
Dollar General Corporation Price, Consensus and EPS Surprise

Dollar General Corporation price-consensus-eps-surprise-chart | Dollar General Corporation Quote

Sales in the Consumables category increased 1.8% to $6,613 million, while the same in Seasonal category witnessed a decline of 6.1% to $1,090.3 million. Home Products sales fell 4.2% to $561.2 million, while Apparel category sales dropped 12.4% to $385.7 million.

Gross profit declined 2.9% to $2,737.7 million during the quarter, while gross margin contracted 80 basis points to 31.6% due to higher transportation expenses, an increased LIFO provision, a significant proportion of sales coming from the consumables category, which usually carry a lower gross profit rate, and an increase in inventory damages. These were partly offset by higher inventory markups and a reduction in inventory shrink as a percentage of net sales.

Meanwhile, selling, general and administrative expenses, as a percentage of net sales, deleveraged 138 basis points to 21.8% in the quarter. Further, operating profit fell 18.5% to $849.6 million, whereas operating margin shriveled to 9.8% from 12% in the year-ago period.

Store Update

Todd Vasos, chief executive officer, said, “During the quarter, we made significant progress on many key initiatives, including the completion of our initial rollout of DG Fresh and the opening of our first pOpshelf store-within-a-store concept.”

During the quarter, Dollar General opened 270 new stores, remodeled 477 stores and relocated 25 stores. For fiscal 2021, the company remains on track to carry out 2,900 real estate projects. This includes 1,050 new store openings, 1,750 remodels and 100 relocations.

Other Financial Details

Dollar General ended the quarter with cash and cash equivalents of $313.7 million, long-term obligations of $4,156.8 million and shareholders’ equity of $6,137.1 million. As of Jul 30, 2021, total merchandise inventories, at cost, came in at $5,279.3 million, up 13.7% on a per-store basis.

Management incurred capital expenditures of $518 million in the 26-week period ended Jul 30, 2021. For fiscal 2021, the company anticipates capital expenditures in the bracket of $1.1-$1.2 billion.

During the quarter, the company repurchased 3.3 million shares of worth $700 million. The company had $979 million remaining under the authorization at the end of the quarter. The company now expects to make share repurchases of approximately $2.4 billion in fiscal 2021 compared to its prior expectation of roughly $2.2 billion.

Outlook

Dollar General cautioned that there remains significant uncertainty related to the severity and duration of the ongoing pandemic, and its impact on the economy, consumer behavior and the business. As a result, it is tough to forecast specific outcomes.

Additionally, management said, “In addition, such outcomes could be impacted by several variables, which include, but are not limited to, any additional government stimulus payments, economic recovery, employment levels, COVID-19 vaccine status, further disruptions to the global supply chain, and the ongoing impact of the COVID-19 pandemic, including new variants of concern and any corresponding governmental measures such as closures of schools or businesses.”

Despite uncertainty related the pandemic and a likely increase in transportation and distribution expenses for the remainder of the fiscal year, Dollar General updated its view owing to solid results in the first half.

Notably, Dollar General now envisions fiscal 2021 net sales to increase in the band of 0.5% to 1.5% and same-store sales to decline in the range of 2.5-3.5%. The company now anticipates earnings between $9.60 and $10.20 per share. The Zacks Consensus Estimate for fiscal 2021 is currently pegged at $10.21.

We note that the company had earlier predicted fiscal 2021 net sales to be down 1% to up 1% and same-store sales to decline in the band of 3-5%. The company had earlier guided earnings between $9.50 and $10.20 per share.

Shares of this Zacks Rank #2 (Buy) company have increased 15.1% in the past three months compared with the industry’s rally of 11.7%.

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The Children's Place PLCE, a Zacks Rank #1 stock, has a long-term earnings growth rate of 8%.

Tapestry TPR has a long-term earnings growth rate of 10%. Currently, it carries a Zacks Rank #2.


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