Dollar General (DG) Stock Up on Q1 Earnings & Sales Beat

Dollar General Corporation DG reported better-than-expected results for the second straight quarter, as the company posted first-quarter fiscal 2017 financial numbers. The company posted adjusted earnings of $1.03 per share surpassing the Zacks Consensus Estimate of 99 cents but was flat year over year.

Net sales came in at $5,609.6 million, an increase of 6.5% from the prior-year quarter. Moreover, net sales came ahead the Zacks Consensus Estimate of $5,598 million, marking the second consecutive quarter of beat.

Following the results, the company’s shares are up roughly 4% during pre-market trading session. However, the company’s shares have declined 19.2% in the past one year, underperforming the Zacks categorized Retail-Discount & Variety industry’s gain of 1.1%.

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 0.7% year over year primarily owing to rise in average transaction amount. However, the gain was marginally overshadowed by fall in traffic. Consumables and apparel categories provided a boost to the comparable-store sales while the seasonal and home categories had a negative impact.

Sales in the Consumables category increased 6.8% to $4,315.5 million, while the Seasonal category witnessed a rise of 6.2% in sales to $662.6 million. Home products sales increased 3.2% to $333.2 million and Apparel category sales grew 6.7% to $298.3 million.

Gross profit increased 5.4% to $1,699 million, while gross margin contracted 34 basis points (bps) to 30.3% due to increased markdowns, on account of inventory clearance and promotional activities along with a higher percentage of sales of consumables which generally have lesser gross profit in comparison to non-consumables.

Operating profit declined 1.4% to $473.8 million, while operating margin decreased 68 bps to 8.5%.

Other Financial Details

Dollar General ended the quarter with cash and cash equivalents of $206 million, long-term obligations of $2,632 million and shareholders’ equity of $5,528.9 million. During the quarter, the company incurred capital expenditures of $144 million. Capital expenditure for fiscal 2017 is now anticipated to be in the range of $715–$765 million, up from the previous guidance of $650–$700 million.

The company bought back 1.3 million shares in the first quarter. Since the commencement of the share repurchase program in Dec 2011, the company has bought back 75.6 million shares aggregating $4.7 billion. At the end of the first quarter, the company has an outstanding authorization of nearly $845 million. Further, management announced a quarterly dividend of 26 cents per share that will be payable on Jul 25, 2017 to shareholders of record as on Jul 11. Further in fiscal 2017, the company continues to expect share repurchase of nearly $450 million.

Store Acquisition

The company revealed that the Federal Trade Commission approved its plan to buy 322 stores across 36 states, from a small multi-price point retailer. While the deal is expected to conclude in Jun 2017, the new store sites are expected to be converted into Dollar General’s banner by Nov 2017 end. This transaction is likely to impact fiscal 2017 results.

Outlook

Including the impact from the aforementioned buyout, management now anticipates net sales to rise in the band of 5–7%, compared with the previous forecast of 4–6% increase. Same-store sales growth is still anticipated in the band of slightly positive to 2% for fiscal 2017. Further, GAAP earnings outlook was reiterated in the band of $4.25 to $4.50 per share.

Moreover, the company expects to buyback nearly $450 million in fiscal 2017, and intends to introduce roughly 1,290 new outlets, relocate or remodel 760 stores and shutter down 140 stores. As of May 5, 2017, Dollar General operated 13,320 stores across 43 states.

Dollar General Corporation Price, Consensus and EPS Surprise

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

Zacks rank & Stocks to Consider

Dollar General’s currently carries a Zacks Rank #4 (Sell). Better-ranked stocks in the retail sector include Gildan Activewear Inc. GIL, PVH Corp. PVH and Guess', Inc. GES. All three of them carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Gildan Activewear, with long-term earnings per share growth rate of 12.3%, has delivered positive earnings surprise in the last two quarters.

PVH delivered an average positive earnings surprise of 6.5% in the trailing four quarters and has a long-term earnings growth rate of 11.2%.

Guess' delivered an average positive earnings surprise of 33.3% in the preceding four quarters and has a long-term earnings growth rate of 17.5%.

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