3 Key Takeaways From Dollar General's First Quarter

Source: Dollar General 

Dollar General (NYSE: DG  ) shares were up nearly 3% Tuesday morning following the company's first-quarter report. Did the discount chain continue its winning streak -- or did it fall behind competitors Family Dollar (NYSE: FDO  ) and Dollar Tree (NASDAQ: DLTR  ) ?  

Analysts had estimated $4.6 billion in revenue with earnings per share of $0.73. Dollar General fell short on revenue with $4.52 billion -- up 7% on the prior year's quarter -- and missed on EPS by $0.01. Dollar General has now missed estimates on both metrics in half of the past six quarters. Comparable-store sales for the quarter were up 1.5%. 

Beyond the basic financial results there are three key takeaways from Dollar General's latest earnings that Foolish investors should be aware of. 

1. Consumables reliance declines slightly
Discount stores have increasingly relied on sales of consumables, which include food and often tobacco. Dollar General's fourth-quarter report, in March, showed that consumables accounted for over 73% of the company's overall revenue. Also, that number only fell slightly to 73% -- flat -- in the first-quarter report.

Consumables sales were still up nearly 8% year-over-year. Home goods were up 7% and even the typically underperforming apparel segment was up over 3%. However, does Dollar General depend more heavily on consumables than the competition?

Family Dollar's second-quarter report, released in April, showed that consumables accounted for 71% of overall revenue -- but sales for the segment were also down 4% from the prior year's quarter. Also, Dollar Tree doesn't break out individual segments like the others. 

While it's great that Dollar General keeps growing its key segment, consumable sales don't have the greatest margin potential. 

2. Gross profit drops 57 basis points, net income nearly flat
Dollar General's first-quarter gross profit dropped 57 basis points to 30% of sales. The company attributed the drop first and foremost to the low margins available with consumable sales, though increased markdowns in the quarter also contributed to the problem. 

Also, the gross profit drop was one of the reasons that net income was only up about 1% despite the 7% revenue growth. S&G expenses also increased 37 basis points as a percentage of sales mostly due to higher rent and utilities.

3. Full-year guidance unchanged 
Dollar General expects this year's total sales to rise 8-9% over last year's $17.5 billion with an EPS range of $3.45-$3.55. It expects comps to rise 3-4%. 

Those numbers match the forecast provided in the fourth-quarter report, so nothing happened in the first quarter that Dollar General wasn't expecting. That doesn't make for the most exciting earnings read, but stability has its own virtues. 

Competitor comparison 
Family Dollar's second-quarter report was so bad the company had to announce "immediate strategic actions", which included the planned closure of 370 stores and a new focus on reducing both product prices for customers and the chain's own cost structure. The company's revenue was down about 6% year-over-year and comps were down nearly 4%. 

Dollar Tree's recent first-quarter report was closer to Dollar General's results but the company had more room to grow since Tree has a market cap about $6 billion smaller than that of General. Tree's revenue was up 7% to $2 billion and comps were up 2%. SG&A expenses were up, which helped reduce the gross margin by about 40 basis points, year-over-year.    

Foolish final thoughts
Dollar General reported an adequate quarter that continued to show the company's relative strength in the market. Dollar Tree benefits from being the only true dollar store -- meaning products priced at $1 -- out of the three companies. Also, Family Dollar suffers from being stuck in the middle in regard to its business model but trails behind in terms of performance.  

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