It took a full three months for shares of dollar-store titan Dollar General (NYSE:DG) to clamber back to previous levels following a dive upon release of the company's fiscal third-quarter 2018 earnings report in early December. In the trading session following issuance of fourth-quarter earnings on Thursday, shares plunged as much as 10%, retracing to December levels, courtesy of another disappointing quarter and a lukewarm earnings outlook for 2019.
Below, we'll delve into the quarter's details following a review of headline numbers. Note that all comparative numbers in this article are presented against the prior-year quarter (the fiscal fourth quarter of 2017).
The raw numbers
|Metric||Q4 2018||Q4 2017||Change (YOY)|
|Revenue||$6.65 billion||$6.13 billion||8.5%|
|Net income||$483.2 million||$712.2 million||(32.2%)|
What happened with Dollar General this quarter?
The company reported a healthy same-store sales increase of 4%, the result of higher traffic and a higher average ticket. Management believes both factors were fueled by an early release of SNAP (Supplemental Nutrition Assistance Program) benefits by the U.S. government during the quarter.
- Higher markdowns, lower initial markups on purchased inventory, a greater proportion of sales in the lower-margin consumables category, and an increase in the company's last-in, first-out (LIFO) inventory provision were all among factors cited by Dollar General for its nearly one percentage point decrease in gross margin to 31.2%. These pressures were partially offset by reduced inventory shrink (i.e., wastage, spoilage, and theft).
Selling, general, and administrative (SG&A) expenses as a percentage of sales decreased by 0.3 percentage points, to 21.6% of sales. Management attributed the improvement to lower repairs and maintenance, utilities, benefits, and incentive compensation expenses. These were reduced by hurricane and disaster-related expenses, as well as by expenses stemming from the closure of 35 underperforming stores during the quarter.
The decline in gross margin and relatively static operating expense as a percentage of sales resulted in an increase of just 2.4% in operating profit, to $638.5 million.
After enjoying a tax benefit of $113 million in the fourth quarter of 2017 due to last year's U.S. tax legislation, Dollar General recorded quarterly tax expense of $130.2 million in the current period. This swing of roughly $243 million in tax expense pushed net income down substantially in the fourth quarter of 2018 versus the same quarter last year. This resulted in the wide differential in net income and earnings per share between periods shown in the table above.
The company engaged in share repurchases worth $352.5 million over the last three months and finished the year with $1 billion in total stock repurchases.
- Dollar General's board of directors approved a 10% increase in the company's quarterly dividend to $0.32, which will yield 1.2% annually based on today's share price.
What management had to say
In addition to ongoing private-label goods expansion and margin-enhancement programs, Dollar General announced two new strategic initiatives on Thursday: "DG Fresh," which will enable a higher return on fresh and frozen food products, and "Fast Track," a project designed to increase both labor efficiency and customer service. CFO John Garratt addressed the company's multiple optimization projects in Dollar General's earnings press release:
Our operating and financial plan for fiscal year 2019 is balanced between investing in the long-term health of the business and delivering returns to our shareholders. We are excited about our strategic initiatives, and we are devoting resources to support them as we believe they will create sustainable benefits for the company. In 2019, we expect to invest approximately $50 million in SG&A to advance these projects. We remain confident in the business and over the long term, our goal generally remains double-digit adjusted diluted EPS growth.
Shareholders' consternation following Dollar General's earnings filing is due in part to its rather weak 2019 outlook. The company expects total revenue to advance by 7% year over year, which represents a deceleration against the 9.2% improvement recorded in fiscal 2018.
Same-store sales growth is anticipated to hit 2.5%, versus the 3.2% gain booked in 2018. While earnings are projected to rise, the difference will be modest: Management has pegged a range of $6.30 to $6.50 for diluted 2019 EPS. At the midpoint, Dollar General will reap an improvement of roughly 7% against the $5.97 in diluted EPS it booked in fiscal 2018.
In the context of the projected slowing sales improvement, investors were likely expecting more progress on the dollar retailer's bottom line in 2019, especially given the numerous margin-improvement initiatives management has launched in recent quarters. After two consecutive quarters of earnings angst, shares may continue to trade on negative sentiment in the near term.