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Dollar General Has More Expansion in Store for Q2

By Rich Duprey – Updated Aug 22, 2019 at 5:15PM

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The leading deep-discount chain also plans extensive remodeling.

Like many retailers, Dollar General (DG -0.48%) undoubtedly was relieved when President Trump delayed implementation of the next round of so-called List 4 tariffs. Because the leading dollar store sources much of its inventory from China, the large swath of goods that would have been covered by this new round of duties could have hit sales and earnings hard.

Dollar General and other companies have mitigated the impact of many of the previous tariffs by negotiating with suppliers and vendors. But the sheer breadth of products covered by the newest round would have had far-reaching effects.

With the company scheduled to report second-quarter earnings on Thursday, Aug. 29, let's see what its investors might expect.

Woman paying at register

Image source: Dollar General.

A fresh experience

Dollar General is in expansion mode, planning to open nearly 1,000 stores this year. It opened a quarter of that total in the first quarter, and it would not be surprising to see it open a similar amount or more this time around.

Investors shouldn't worry that the new locations will eat into existing-store sales. Even with the openings Dollar General has already accomplished, comparable-store sales were up almost 4% last quarter, the fourth consecutive quarter of flat to positive growth. This was achieved through a combination of higher prices, better product mix, and -- importantly -- more traffic.

Driving the repeat business has been the addition of more consumables like fresh produce and drinks. While these reduce gross profit margins, Dollar General has offset that with the residual halo effect around its non-consumables. Customers come in for the produce and drinks and end up buying other, higher-margin goods, too, lifting profits for the entire store.

At the same time that the chain is adding new stores with more refrigerator cases to display the fresher goods, it is also remodeling existing ones to complement the reset strategy.

There are two types of remodels among the nearly 1,000 planned this year: a traditional one, with 22 refrigerator-freezer doors, which tends to lift comps 4% to 5%; and its Dollar General Traditional Plus (DGTP), with 34 higher-capacity cooler doors on average, which generates a 10% to 15% lift in comps. 

Reaching new customers

In a bid to bring in customers who wouldn't ordinarily shop its stores, Dollar General has also partnered with FedEx (FDX 0.86%) to serve as a drop-off and pickup point for packages in some 8,000 stores by 2020.

Dollar General stores typically are in middle to lower income neighborhoods -- and ones that are less densely populated -- and three-quarters of the country's population lives within five miles of one.

FedEx notes that almost half of its customers prefer to make a return in-store, so giving them a chance to pop into a local Dollar General could bring in more foot traffic. It's not likely to move the needle for either party, but it could allow for incremental growth.

Steady as she goes

Although Dollar General is seeing increased freight and transportation costs, like other retailers, it maintained its full-year guidance. It expects sales to rise 7% in 2019 on a 2.5% gain in comps, and earnings landing in a range of $6.30 to $6.50 per share, which at its midpoint is 7% higher than a year ago. The company doesn't offer quarterly guidance.

Analysts are looking for $6.89 billion in revenue this quarter, up 7% from last year, with consensus earnings of $1.58 per share, a near 4% rise. For the full year, they're calling for 7% and 8% growth, respectively, in the two categories.

The chain says it's on plan to keep sales and profits rising by introducing a broad range of strategies to appeal to the widest possible audience. The deep-discount segment looks to be more primed for growth than others, and Dollar General should once again rise to the top of the space.

Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends FedEx. The Motley Fool has a disclosure policy.

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