Dollar General Corp. (DG, Financial) is slated to report its first quarter results for fiscal 2015 on 2nd June 2015. The company competes with businesses such as Wal-Mart Stores Inc. (WMT, Financial) and Dollar Tree (DLTR, Financial) in the discount retail chain stores segment.
Dollar General reported 15.8% year-over-year growth in earnings to $1.17 a share for the fourth quarter of fiscal 2014, in line with the consensus estimate. However, the company’s 9.9% growth in net sales to $4.93 billion for the quarter fell short of the consensus estimate of $4.95 billion. The company saw strong growth across all segments on the back of rising traffic and average transaction value that led to 4.9% increase in comparable-store sales. While Dollar General saw gross profit rising 9.1% year-over-year to $1.56 billion, gross margin shrank 23 basis points to 31.7% owing to higher sales of consumables and other such products that carried lower margins. Following the results, Dollar General projected earnings between $3.85 and $3.95 a share for fiscal 2015, while total sales are expected to grow by 8% to 9% on a year-over-year basis. The company also expects comparable store sales to grow in the range of 3% to 3.5%. Shares of Dollar General are currently down by 1.9% since the company’s last earnings report.
Growing Market Competition a Worry
Dollar General has had a relatively good run since its 2009 return to the public markets. The company’s shares have more than tripled in value and offered investors a 27% compounded annual rate of return. However, since peaking in 2013, the company has been grappling with increasing pressure on gross margin owing to growing sales of low margin consumables. At the same time, the discount retailer is in a transition period where it will be ushering in a new group of executives to take on challenges in a changing marketplace and face bigger rivals such as Wal-Mart and Target that are trying to penetrate the deep-discount store segments with their Neighborhood Markets and TargetExpress ventures respectively. Further, the company also faces tough competition from Dollar Tree, which recently acquired Family Dollar and expanded its footprint in the discount-stores marketplace.
While Dollar General provided in-line guidance for FY2015, the company said it expected to see the negative impact of West Coast port disruptions during the first quarter. However, the company has significantly lower import exposure compared to rival Dollar Tree. Although extreme weather conditions in February are also likely to have affected the company’s sales, a recent industry report indicates that sales in the retail segment picked up significantly in April 2015.
Implementation of Key Strategies Likely to Benefit Top-line
At the same time, Dollar General has also been putting efforts towards increasing sales and margins. Amongst these is its focus on repackaging its private-label products in both the consumables and non-consumables segments. While private-label goods offer more value-for-money to customers, they also offer nearly 10% higher margins to the retailer compared to similar branded products. Consequently, Dollar General is expecting its top-line to benefit from private-label offerings in the upcoming quarters. The company also recently expanded the availability of tobacco products across its stores, a step that is likely to help boost revenues for the first quarter. According to industry reports, volume of tobacco sales at dollar stores jumped by 42% last year, compared to a mere 1% gain seen at convenience stores.
Further, the company also recently announced the launch of its 12,000th store, and expects to open a total of 730 stores during the fiscal. Dollar General also initiated a 22 cents a share annual dividend and announced plans to repurchase shares worth around $1.2 billion worth in the current fiscal. Consequently, investors are upbeat with regards to the Dollar General shares.
Final Thoughts
Dollar General reported in-line results for Q4 2014, with revenue growth across the board. While the company has multiple headwinds working against it during the first quarter of fiscal 2015 including West Coast port disruptions and increasing competition from discount-retail giants such as Target and Wal-Mart, Dollar General is likely to have held its own owing to the implementation of several strategic plans. Although threat from Dollar Tree post merger with Family Dollar looms large, it would be a while for the impact of the merger to be felt. Goldman Sach recently upgraded the company’s stock to its Conviction Buy rating list, while Deutsche Bank reiterated its Buy rating for Dollar General. The Dollar General stock has mostly traded in the $71-$76 a share range in the last three months. While consensus estimates are looking at Q1 earnings of 82 cents a share on revenues to $4.91 billion, the Dollar General stock currently carries a price estimate of $72.78 and a ‘buy’ guidance.
