Retail discount-chain Dollar General Corporation (DG +1.60%) issued a solid fiscal third-quarter 2018 earnings report on Tuesday before the markets opened, yet a trimming of current-year guidance weighed on shares, which lost nearly 7% during the subsequent trading session. The stock's slump likely was exacerbated by a sour mood on Wall Street, as the S&P 500 index sank 3.25% on the day.
The company cited external forces -- specifically, hurricane-related disaster expenditures -- for its reduced outlook for the year. We'll review management's guidance below after first visiting important details from the last three months. Note that all comparative numbers in this article are presented against the prior-year quarter (the fiscal third quarter of 2017).
The raw numbers
| Metric | Q3 2018 | Q3 2017 | Change (YOY) |
|---|---|---|---|
| Revenue | $6.42 billion | $5.90 billion | 8.8% |
| Net income | $334.1 million | $252.5 million | 32.3% |
| Diluted EPS | $1.26 | $0.93 | 35.4% |
Data source: Dollar General Corporation. YOY = year over year. EPS = earnings per share.
What happened with Dollar General this quarter?
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Dollar General reported a same-store sales increase of 2.8%. While customer traffic was flat, the company realized higher per-transaction sales in its consumables, seasonal, and home categories. These gains were partially offset by weaker apparel sales. The balance of the company's nearly 9% revenue advance was supplied by new store openings.
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Gross margin slipped 0.4 percentage points, to 29.5%. Management pointed to several factors that influenced gross margin -- including an increase in the company's last in, first out (LIFO) inventory provision due to import tariffs, a higher proportion of lower-margin consumables sales, climbing freight costs, and higher markdowns. These factors were mitigated by a decreased rate of inventory shrink (i.e. waste, spoilage, and theft).
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Despite a slightly lower gross margin, Dollar General's operating margin benefited from both the higher sales level and a reduction in selling, general, and administrative (SG&A) expenses. Lower incentive compensation, advertising, repair and maintenance, and supplies expenses offset higher depreciation expense. Total SG&A as a percent of sales dipped 0.3 percentage points, to 22.9%.
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While higher operating profit contributed to the increase in net income, a lower tax rate via last year's U.S. tax legislation provided 23 percentage points of the 32% net income improvement shown in the table above.
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The company released its real estate plan for fiscal year 2019 (which begins on Feb. 2, 2019). Dollar General plans to complete 2,075 real estate projects, which will consist of 975 new store openings, 1,000 store renovations, and 100 store relocations. The 2019 plan mirrors the 2018 framework, with the exception of new store openings, which have increased by 75 over the current-year goal of 900. For context, Dollar General currently operates more than 15,000 stores.
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Dollar General repurchased $298 million worth of its own shares during the quarter, bringing its year-to-date repurchase total to $647.5 million.
Image source: Getty Images.
What management had to say
During the company's earnings conference call, CEO Todd Vasos noted that two major hurricanes (Florence and Michael) wreaked havoc in some of the company's "most heavily penetrated areas in the southeastern United States" within the third quarter. CFO John Garratt quantified the effects on both the third quarter and the outlook for the fiscal year in the company's earnings press release:
As a result of the third-quarter hurricanes and other disasters, we will record greater-than-anticipated expenses in the second half of 2018. ... In total, the impact to third-quarter EPS [earnings per share] was an estimated $0.05 per diluted share and we expect to see an additional estimated $0.04 impact on our fourth quarter diluted EPS. We have adjusted our full-year outlook to reflect the estimated $0.09 impact of these events, ongoing transportation cost pressures and year-to-date results. Despite these challenges, we expect to deliver our 29th consecutive year of same-store-sales growth with strong net sales, EPS, and cash flow growth.
Looking forward
Given these external factors, Dollar General lowered several fiscal 2018 guidance mileposts against its last outlook update issued at the end of August. The company now expects revenue growth of 9% versus a prior expectation of 9%-9.3%. Same-store sales growth is anticipated at 2.75% for the year compared to the previous "mid-to-high 2 percent range."
Dollar General has clipped its full-year operating margin target, which was earlier expected to be flat against the prior year. Currently, management forecasts that it will fall "modestly below" below fiscal 2017 operating margin of 30.8%.
Following CFO Garratt's commentary above, 2018 diluted EPS is slated to land between $5.85-$6.05. In August, the company had advised investors to expect EPS of between $5.95 and $6.15. Barring any additional unexpected weather events, Dollar General earnings should be able to fall squarely within the updated EPS range.
