It has been about a month since the last earnings report for Dollar General (DG). Shares have added about 6.4% in that time frame, outperforming 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 its most recent earnings report in order to get a better handle on the important drivers.
Dollar General Q1 Earnings & Sales Beat Estimates
Dollar General Corporation reported better-than-expected first-quarter fiscal 2019 results, wherein both the top and bottom line grew year over year. Also, the company witnessed sturdy same-store sales performance.
Looking ahead, the company retained its fiscal 2019 view. Management informed that the guidance “includes the anticipated impact of increased tariff rates on certain products imported from China, which became effective on May 10, 2019.”
Let’s Delve Deep
The quarterly earnings came in at $1.48 per share that surpassed the Zacks Consensus Estimate of $1.39 and increased 8.8% from the prior-year period. The year-over-year increase in the bottom line can be attributed to higher net sales, cost containment efforts, lower effective income tax rate and share repurchase activity.
Net sales of $6,623.2 million improved 8.3% from the prior-year period and came ahead of the Zacks Consensus Estimate of $6,566 million for the fourth quarter in row. Contribution from new outlets and same-store sales growth favorably impacted the top line.
Dollar General’s same-store sales increased 3.8% year over year primarily owing to rise in average transaction amount and customer traffic. Consumables, Seasonal and Home categories favorably impacted the metric, while Apparel category had a negative impact on the same.
Sales in the Consumables category increased 9.2% to $5,213.2 million, while the same in Seasonal category witnessed a rise of 6.6% to $737 million. Home Products sales rose 5.9% to $375.7 million, while Apparel category sales grew 0.3% to $297.3 million.
Gross profit advanced 7.5% to $2,002.3 million, however, gross margin contracted 23 basis points (bps) to 30.2% owing to sales of products carrying lower margin and higher distribution and transportation costs. A higher proportion of sales came from Consumables. These were partly offset by higher initial markups on inventory purchases. Meanwhile, operating income rose 4.5% to $512.2 million, however, operating margin shriveled 29 basis points to 7.7%.
During the quarter, the company opened 240 new outlets, remodeled 330 stores and relocated 27 stores. In 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 $271.1 million, long-term obligations of $2,732.1 million and shareholders’ equity of $6,572.7 million. The company incurred capital expenditures of $145 million during the first quarter of fiscal 2019. For fiscal 2019, it continues to anticipate capital expenditures in the range of $775-$825 million.
The company bought back 1.7 million shares for $200 million during the quarter under review. At the end of the quarter, it has an outstanding authorization of nearly $1.1 billion. The company intends to buyback shares worth $1 billion during fiscal 2019.
Management continues to envision fiscal 2019 earnings in the band of $6.30-$6.50 per share. We note that the company’s projection is above fiscal 2018 reported earnings of $5.97 per share.
Dollar General reiterated fiscal 2019 net sales growth projection of 7% with same-store sales expected to increase approximately 2.5%. The company envisions operating profit growth of approximately 4-6%.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates.
Currently, Dollar General has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Dollar General has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.
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