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Why Is Dollar General (DG) Down 6.1% Since the Last Earnings Report?

Zacks Equity Research

A month has gone by since the last earnings report for Dollar General Corporation DG. Shares have lost about 6.1% in that time frame, underperforming the market.

Will the recent negative trend continue leading up to the stock's next earnings release, or is it due for a breakout? 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 Tops Q4 Earnings & Sales; Guides FY17

Dollar General reported better-than-expected earnings in fourth-quarter fiscal 2016 after missing the same in the trailing two quarters. The company posted adjusted earnings of $1.49 per share that surpassed the Zacks Consensus Estimate of $1.41 and also increased 14.6% from the year-ago period.

Net sales came in at $6,009.2 million, an increase of 13.7% from the prior-year quarter. Moreover, net sales came above the Zacks Consensus Estimate of $5,969 million, marking the first quarter of revenues beat in 14 quarters.

The company’s robust results were driven by robust performance of consumables, seasonal, home products and apparel.

The company’s comparable-store sales inched up 1% year over year primarily owing to rise in average transaction amount. However, the gain was marginally overshadowed by fall in traffic that moderated from the second and third quarters. Consumables and home products categories provided a boost to the comparable-store sales while the seasonal and apparel categories had a negative impact.

Sales in the Consumables category jumped 15.1% to $4,505.5 million, while the Seasonal category witnessed a rise of 8.5% in sales to $800.5 million. Home products sales increased 11.3% to $405.2 million and Apparel category sales grew 10.2% to $297.9 million.

Gross profit increased 13% to $1,900.7 million, while gross margin contracted 20 bps to 31.6% due to increased markdowns, on account of inventory clearance and promotional activities along with a higher percentage of sales of consumables.

Operating profit rose 11.1% to $680.6 million, while operating margin decreased 30 bps to 11.3%.

Other Financial Details

Dollar General ended the quarter with cash and cash equivalents of $187.9 million, long-term obligations of $2,710.6 million and shareholders’ equity of $5,406.3 million. During fiscal 2016, the company incurred capital expenditures of $560 million. Capital expenditure for fiscal 2017 is expected to be in the range of $650–$700 million.

The company bought back 12.4 million shares during fiscal 2016 for $990 million. Since the commencement of the share repurchase program in Dec 2011, the company has bought back 74.4 million shares aggregating $4.6 billion. On Aug 24, 2016, it announced an additional share repurchase program of $1 billion, thereby increasing the share repurchases authorization to nearly $1.4 billion. The company still has nearly $930 million of share repurchase left under current authorization. Further in fiscal 2017, the company expects share repurchase of nearly $450 million.

Store Update

Dollar General opened 900 new outlets and remodeled or relocated 906 outlets during fiscal 2016. During fiscal 2017, the company plans to open about 1,000 stores and remodel or relocate approximately 900 stores. As of Feb 3, 2017, Dollar General operated 13,320 stores across 43 states.

Outlook

Dollar General provided fiscal 2017 guidance wherein the company expects sales growth in the range of 4–6%. Same-store sales growth is expected to be marginally positive to up 2% while earnings per share are expected to be between $4.25 and $4.50. Due to lapping of the 53rd week in 2016, the company expects fiscal 2017 net sales and earnings to be negatively impacted by 2% and 8%, respectively.

How Have Estimates Been Moving Since Then?

Following the release, investors have witnessed a downward trend in fresh estimates. There has been one revision higher for the current quarter compared to five lower. In the past month, the consensus estimate has shifted lower by 5.4% due to these changes.

Dollar General Corporation Price and Consensus

 

Dollar General Corporation Price and Consensus | Dollar General Corporation Quote

VGM Scores

At this time, Dollar General's stock has a great Growth Score of 'A', though it is lagging a lot on the momentum front with an 'D'. However, 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.

Our style scores indicate that the stock is more suitable for growth investors than value investors.

Outlook

Estimates have been broadly trending downward for the stock. The magnitude of this revision also indicates a downward shift.  It's no surprise that the stock has a Zacks Rank #4 (Sell). We are expecting a below average return from the stock in the next few months.


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