A month has gone by since the last earnings report for Dollar General (DG). Shares have added about 9.6% 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 the most recent earnings report in order to get a better handle on the important drivers.
Dollar General Misses on Q4 Earnings, Issues Soft View
Dollar General Corporation reported fourth-quarter fiscal 2018 results, wherein the bottom line fell short of the Zacks Consensus Estimate. Also, the company provided soft earnings view for fiscal 2019.
Management now envisions fiscal 2019 earnings in the band of $6.30-$6.50 per share, which is below analysts’ expectations. However, the company’s projection is above fiscal 2018 reported earnings of $5.97 per share.
The company’s top line came ahead of the consensus mark. Moreover, both sales and earnings per share improved year over year. The company also witnessed sturdy same-store sales performance buoyed by both consumable and non-consumable product sales. Moreover, management highlighted about its plan to launch two transformational strategic initiatives — DG Fresh, designed to enable self-distribution of fresh and frozen products and Fast Track, an in-store labor productivity and customer convenience initiative.
Let’s Delve Deep
The quarterly earnings came in at $1.84 per share that missed the Zacks Consensus Estimate of $1.88 but increased 24.3% 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 federal tax rate and share repurchase activity.
Net sales of $6,649.8 million improved 8.5% from the prior-year period and came ahead of the Zacks Consensus Estimate of $6,602.6 million for the third quarter in row. Contribution from new outlets and comparable-store sales growth favorably impacted the top line.
Dollar General’s same-store sales increased 4% 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% to $5,045.8 million, while the same in Seasonal category witnessed a rise of 7.2% to $879.1 million. Home Products sales rose 10.4% to $434.4 million, while Apparel category sales grew 1.5% to $290.5 million.
Gross profit advanced 5.4% to $2,071.7 million, however, gross margin contracted 91 basis points (bps) to 31.2% owing to sales of products carrying lower margin, increased markdowns and lower initial markups on inventory purchases. A higher proportion of sales came from Consumables. These were partly offset by an improved rate of inventory shrink. Meanwhile, operating income rose 2.4% to $638.5 million, however, operating margin shriveled 57 basis points to 9.6%.
During fiscal 2018, Dollar General opened 900 new stores, remodeled 1,050 stores and relocated 115 stores. The company ended the period with 15,370 stores. During 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 $235.5 million, long-term obligations of $2,862.7 million and shareholders’ equity of $6,417.4 million. The company incurred capital expenditures of $734 million during fiscal 2018. For fiscal 2019, it now anticipates capital expenditures in the range of $775-$825 million.
The company bought back 9.9 million shares for $1 billion during fiscal 2018. At the end of the fiscal year, it has an outstanding authorization of nearly $346 million. The company’s board of directors increased the share buyback authorization by $1 billion and also raised the quarterly dividend by 10% to 32 cents a share. During the quarter, the company bought back 3.4 million shares for $360 million and paid dividend of $75 million.
Management now expects fiscal 2019 net sales to increase about 7% with same-store sales growth of approximately 2.5%. The company now 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. The consensus estimate has shifted -7.48% due to these changes.
At this time, Dollar General has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of B on the value side, putting it in the second quintile 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 #3 (Hold). We expect an in-line return from the stock in the next few months.
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