What happened

Shares of Dollar General (DG -1.72%) 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." 

Check out the latest earnings call transcript for Dollar General.

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.