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Dollar General Well Positioned
Deep discounter Dollar General (NYSE:DG) reported a substantial earnings increase on strong sales during its first quarter. The numbers, however, came in shy of analyst estimates, so the stock was punished. Investors were concerned over lower margins and product markdowns. (To learn more about earnings, read Earnings Forecasts: A Primer.)
TUTORIAL: Earning Quality
Markdowns and Margins
Dollar General, which sells most of its items for below $10, heavily marked down winter home and apparel merchandise during the quarter. Wall Street observers have pointed to clothing as a product area where Dollar General has had difficulties, so the shedding of a lot of that merchandise will require an adjustment to the product mix. Part of this already occurred with a shift to more food items and cleaning products, which are lower margin products.
Gross margins fell to 31.5% from 32.1% in the year-ago quarter. Part of this was an LIFO charge of $3.6 million, or 10 basis points, due to rising commodity costs. Rising fuel costs are another factor at play in not only the shipping of goods, but the transiting of consumers to stores as well. The company's selling, general and administrative expense (SG&A) did decrease 60 basis points, to 22.2% of sales, or $766 million, from the previous year's quarter, so some costs were held in check. (To learn more about margins, check out A Look At Corporate Profit Margins.)
A Good Quarter Still
Dollar General held item prices down, yet still managed record sales in the quarter of $3.45 billion, compared to $3.11 billion in last year's first quarter. Same-store sales rose 5.4%. Reported net income was $157 million, or 45 cents a share, compared to $136 million, or 39 cents a share in last year's quarter.
Despite rising commodity costs and a consumer under pressure, Dollar General maintained its outlook for the year, with sales expected to increase 11-13% along with a same store sales rise of 3-5%. EPS should be in a range of $2.20 to $2.30. Capital expenditures are expected to be between $550 million and $600 million, with roughly 55% of that going toward investment in store development, as Dollar General plans 625 new stores this year. (For more on how to breakdown earnings reports, see How To Decode A Company's Earnings Reports.)
Dollar Stores
Dollar General, which is majority owned by Kohlberg, Kravis & Roberts (NYSE:KKR), is in a sector that has attracted the attention of private equity. Indeed, the Dollar General stock decline after the earnings report lowered the value of KKR's stake by $600 million. Private equity sees more deals in the space. Leonard Green & Partners made a takeover bid for 99 Cents Only Stores (NYSE:NDN), while Family Dollar (NYSE:FDO) rejected Nelson Peltz's Trian Group takeover offer in March. Hedge funds have also taken note. Edward Lampert, who owns Sears Holdings (Nasdaq:SHLD), has taken a position in off-price retailer Big Lots (NYSE:BIG). Bill Ackman, through his Pershing Square Capital, has bought into Family Dollar, as have other large hedge funds.
Dollar General's Prospects
The same day Dollar General's earnings came out, a weak jobs report also slammed the market. If the economy stays weak, this should add to Dollar General's (and other dollar retailers') customer base. Dollar General is also regarded as one of the stronger players in the dollar store sector.
The Bottom Line
With KKR's management input, Dollar General is developing private label and branded products, which some say puts them ahead of the other dollar retailers. Dollar General has even been mentioned as a possible bidder for Family Dollar. Expansion is on its mind, as CEO Rick Dreiling mentioned that there's room to go from its 9,500 stores to 12,000. With lots of positives, Dollar General has positioned itself solidly for a long run. (To help you understand retail stock, check out Analyzing Retail Stocks.)
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TUTORIAL: Earning Quality
Markdowns and Margins
Dollar General, which sells most of its items for below $10, heavily marked down winter home and apparel merchandise during the quarter. Wall Street observers have pointed to clothing as a product area where Dollar General has had difficulties, so the shedding of a lot of that merchandise will require an adjustment to the product mix. Part of this already occurred with a shift to more food items and cleaning products, which are lower margin products.
Gross margins fell to 31.5% from 32.1% in the year-ago quarter. Part of this was an LIFO charge of $3.6 million, or 10 basis points, due to rising commodity costs. Rising fuel costs are another factor at play in not only the shipping of goods, but the transiting of consumers to stores as well. The company's selling, general and administrative expense (SG&A) did decrease 60 basis points, to 22.2% of sales, or $766 million, from the previous year's quarter, so some costs were held in check. (To learn more about margins, check out A Look At Corporate Profit Margins.)
A Good Quarter Still
Dollar General held item prices down, yet still managed record sales in the quarter of $3.45 billion, compared to $3.11 billion in last year's first quarter. Same-store sales rose 5.4%. Reported net income was $157 million, or 45 cents a share, compared to $136 million, or 39 cents a share in last year's quarter.
Dollar Stores
Dollar General, which is majority owned by Kohlberg, Kravis & Roberts (NYSE:KKR), is in a sector that has attracted the attention of private equity. Indeed, the Dollar General stock decline after the earnings report lowered the value of KKR's stake by $600 million. Private equity sees more deals in the space. Leonard Green & Partners made a takeover bid for 99 Cents Only Stores (NYSE:NDN), while Family Dollar (NYSE:FDO) rejected Nelson Peltz's Trian Group takeover offer in March. Hedge funds have also taken note. Edward Lampert, who owns Sears Holdings (Nasdaq:SHLD), has taken a position in off-price retailer Big Lots (NYSE:BIG). Bill Ackman, through his Pershing Square Capital, has bought into Family Dollar, as have other large hedge funds.
Dollar General's Prospects
The same day Dollar General's earnings came out, a weak jobs report also slammed the market. If the economy stays weak, this should add to Dollar General's (and other dollar retailers') customer base. Dollar General is also regarded as one of the stronger players in the dollar store sector.
The Bottom Line
With KKR's management input, Dollar General is developing private label and branded products, which some say puts them ahead of the other dollar retailers. Dollar General has even been mentioned as a possible bidder for Family Dollar. Expansion is on its mind, as CEO Rick Dreiling mentioned that there's room to go from its 9,500 stores to 12,000. With lots of positives, Dollar General has positioned itself solidly for a long run. (To help you understand retail stock, check out Analyzing Retail Stocks.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Greg Sushinsky
Greg Sushinsky is a passionate independent investor, who has done his own research, analysis and investing for 20 years. One of his earliest investing memories was when he first saved and bought U.S. Savings Bonds with his own money as a small child. From there, he studied investing on his own and made small stock purchases as he grew as an investor.
Sushinsky still follows the markets, studies and reads widely in financial literature, and has written over 75 articles on investing. He is also a professional editor, whose work is published extensively in large-circulation magazines, digests and across the internet. In other pursuits, Sushinsky writes fiction and has a university degree in philosophy. To see more of Sushinsky's literary work, see http://writing.gregsushinsky.com/.
Sushinsky still follows the markets, studies and reads widely in financial literature, and has written over 75 articles on investing. He is also a professional editor, whose work is published extensively in large-circulation magazines, digests and across the internet. In other pursuits, Sushinsky writes fiction and has a university degree in philosophy. To see more of Sushinsky's literary work, see http://writing.gregsushinsky.com/.
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