What happened

Shares of Dollar General (NYSE:DG) were heading lower today after the discount retailer turned in weaker-than-expected earnings and offered a disappointing outlook for 2019. As a result, the stock was down 8.9% as of 10:54 a.m. EDT.

So what

Top-line growth was solid in the quarter as comparable sales increased 4% and overall revenue was up 8.5% to $6.65 billion, which topped estimates at $6.61 billion. The company attributed the strong comps growth in part to an early federal release of SNAP benefits, or food stamps, in the quarter. 

The front of a Dollar General store

Image source: Dollar General.

However, costs also rose faster than expected as gross margin fell from 32.1% to 31.2% due to higher markdowns and a change in sales mix that favored the lower-margin consumables category. Operating profit in the period was up 2.4% to $638.5 million, and with the help of a lower tax rate, adjusted earnings per share rose from $1.48 to $1.84, though that missed expectations of $1.88.

CEO Todd Vasos summed up the performance, saying, "During the fourth quarter we delivered strong same-store sales growth, driven by performance in both consumable and non-consumable product sales, which resulted in our highest two-year same-store sales stack in 21 quarters." 

Now what

Looking ahead to 2019, Vasos said the company would focus on two transformational initiatives, DG Fresh, which enables the company to self-distribute fresh and frozen foods, and DG Fast Track, which is designed to enhance productivity and customer convenience.

However, those initiatives will take a toll on profits; the company forecast earnings per share for the year at $6.30 to $6.50, up from $5.97 last year but worse than analyst estimates at $6.65. On the top line, the retailer guided comparable sales growth of 2.5% and overall revenue growth of 7%, roughly in line with expectations at 7.5%.

Dollar General is continuing its aggressive store expansion with plans to add 975 new stores. Though slower profit growth may be disappointing, the company's long-term strategy remains on track.