Why Is Dollar General (DG) Up 21.2% Since Last Earnings Report?

It has been about a month since the last earnings report for Dollar General (DG). Shares have added about 21.2% 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’s Q4 Earnings Miss Estimates, Increase Y/Y

Dollar General Corporation came up with fourth-quarter fiscal 2020 results, wherein both the top and the bottom lines improved from the prior-year period. The discount retailer also witnessed sturdy same-store sales performance. While net sales surpassed the Zacks Consensus Estimate, earnings were weaker than expected.

The company issued fiscal 2021 guidance, and signaled a decline in same-store sales. The company also guided earnings below analysts’ expectations. Certainly, the company did benefit from coronavirus-led demand spike in fiscal 2020. However, analysts expect pandemic-induced demand to moderate, as vaccination drive gathers pace and consumers return to the old normal.

Management informed that from Feb 27 through Mar 16, 2021, same-store sales declined approximately 16%, as a result of tough year-over-year comparison. We note that the company registered same-store sales growth of 34.5% in March 2020.

Let’s Delve Deep

Quarterly earnings came in at $2.62 per share that missed the Zacks Consensus Estimate of $2.71 but increased 24.8% from $2.10 reported in the prior-year period. The year-over-year increase in the bottom line can be attributed to higher net sales and margins.

Net sales of $8,414.5 million increased 17.6% from the prior-year period and surpassed the Zacks Consensus Estimate of $8,276 million for the 11th straight quarter. Contribution from new outlets and same-store sales growth favorably impacted the top line, partially offset by the impact of store closures.

Dollar General’s same-store sales grew 12.7% year over year, primarily owing to a rise in average transaction amount, partly offset by lower customer traffic. Notably, consumables, seasonal, home products and apparel categories favorably impacted the metric. Among these categories, home products registered the highest increase. Consumer behavior driven by the pandemic significantly benefitted net sales and same-store sales.

Management also updated that from Jan 30 through Feb 26, 2021, same-store sales rose approximately 5.7%, in spite of losing 8,400 store operating days as a result of closures due to winter weather.

Sales in the Consumables category increased 15.5% to $6,321.6 million, while the same in Seasonal category witnessed a rise of 19.7% to $1,097.5 million. Home Products sales soared 32.2% to $608.5 million, while Apparel category sales grew 25.3% to $386.9 million.

Gross profit jumped 20.4% to $2,736.7 million during the quarter under review. Notably, gross margin expanded 77 basis points (bps) to 32.5% due to lower markdowns and reduction in inventory shrink, coupled with higher initial markups on inventory purchases and a significant proportion of sales from the non-consumables product categories. These were partly offset by higher distribution and transportation expenses.

Meanwhile, selling, general and administrative expenses, as a rate of net sales, deleveraged 48 bps to 22.2% in the quarter, thanks to incremental expenses related to COVID-19 pandemic. Further, operating profit surged 21% to $872.2 million, whereas operating margin increased to 10.4% from 10.1% in the year-ago period.

Store Update

During fiscal 2020, Dollar General opened 1,000 new outlets, remodeled 1,670 stores and relocated 110 stores. For fiscal 2021, management plans to carry out 2,900 real estate projects. This includes 1,050 new store openings, 1,750 remodels and 100 relocations. The company plans to open two additional DG Fresh facilities in fiscal 2021. The company also plans to add produce in about 700 stores in fiscal 2021. This will bring the total number of stores that carry produce to more than 1,800.

The company has been working on Dollar General Plus store, or DGP and two new store formats — with a selling space of approximately 8,500 square feet and 9,500 square feet. These will become the company’s base prototype for nearly all new stores replacing both traditional and higher cooler count DGTP formats. The company’s goal is to open more than 550 Dollar General Plus store or new format stores of 8,500 square feet and over 100 new stores of 9,500 square feet.

Other Financial Details

Dollar General ended the quarter with cash and cash equivalents of $1,376.6 million, long-term obligations of $4,131 million and shareholders’ equity of $6,661.2 million. As of Jan 29, 2021, total merchandise inventories, at cost, came in at $5,247.5 million, up 6.3% on a per-store basis from the year-ago period.

Management incurred capital expenditures of $1 billion in fiscal 2020, and included planned investments in new stores remodels and relocations, distribution and transportation projects, and spending related to strategic initiatives. For fiscal 2021, it anticipates capital expenditures in the range of $1.05-$1.15 billion.

During the quarter, the company bought back 4.3 million shares for $900 million. In fiscal 2020, Dollar General repurchased shares worth $2.5 billion. The company had $679 million remaining under authorization at the end of fiscal 2020. Markedly, the company’s board of directors increased the authorization under the share buyback program by $2 billion on Mar 17, 2021. The company expects to make share repurchases of approximately $1.8 billion in fiscal 2021. Also, the company hiked its quarterly dividend by 16.7% to 42 cents a share.

Outlook

Management cautioned that there remains significant uncertainty related to the severity and duration of the ongoing pandemic, and its impact on the economy, consumer behavior and the business. As a result, it is tough to forecast specific outcomes. Additionally, the company said, “In addition, these outcomes could be impacted by several variables, which include, but are not limited to, economic stimulus payments, economic recovery, employment levels, COVID-19 vaccine status, and the ongoing impact of the COVID-19 pandemic.”

Dollar General envisions fiscal 2021 net sales to be flat to down 2% and same-store sales to decline in the band of 4-6% (this reflects growth of about 10-12% on a two-year stack basis). The company anticipates earnings between $8.80 and $9.50 per share (this reflects a compound annual growth rate between 15% and 20%, or between 14% and 19% on an adjusted basis over a two-year period). The company reported earnings of $10.62 in fiscal 2020.

The company expects that increase in markdown rates from abnormally low levels in fiscal 2020 and shift in sales mix toward consumables categories in fiscal 2021 are likely to exert pressure on gross margin. Management cautioned that second and third quarters, represent the most challenging comparison from a gross margin perspective. We note that gross margin had increased 167 basis points and 178 basis points in the second and third quarter, respectively. Moreover, the impact of higher carrier rates and rise in fuel costs on margins cannot be ruled out.

As far as SG&A expenses is concerned, management do expect to incur ongoing pandemic-related costs in fiscal 2021 but significantly down from last year. However, the benefit reaped from these cost reductions is expected to be offset by deleverage associated with lower same-store sales and approximately $60-$70 million incremental investments related to strategic initiatives.

The company expects operating profit to take a hit of approximately $35-$40 million in the first quarter of fiscal 2021 owing to the loss of sales from storage closures and expenses related to the widespread winter weather.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended downward during the past month.

VGM Scores

At this time, Dollar General has an average Growth Score of C, 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 C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Dollar General has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.

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