In fiscal second-quarter 2019 earnings released on Thursday before the markets opened, Dollar General (NYSE:DG) delivered high-single-digit sales growth, mid-single-digit comparable sales growth, and a fairly healthy advance in net earnings. Investors reacted by continuing to treat the stock as a relative bargain: Shares were up 10% at midday on Thursday, and they've gained roughly 44% year to date.

Below, let's uncover the rationale for investors' recent enthusiasm in our review of the last three months. Note that all comparative numbers in this article are presented against those of the prior-year quarter.

The raw numbers

Metric Q2 2019 Q2 2018 Change
Revenue $6.98 billion $6.44 billion 8.4%
Net income $426.5 million $407.2 million 4.7%
Diluted EPS $1.65 $1.52 8.5%

Data source: Dollar General. EPS = earnings per share.

What happened with Dollar General this quarter?

  • The company posted its second consecutive quarter of 8% year-over-year sales growth against management's full-year expectation of 7% expansion (a benchmark that was revised today, as we'll discuss below).
  • Same-store sales rose by a crisp 4%, paced by better customer traffic and a higher average ticket.
  • Consumables sales, which make up more than three-quarters of the company's revenue, grew at a near-9% clip, to $5.4 billion. Seasonal goods sales expanded by 7.8% to $854 million, while home products sales grew by 7.7% to $375 million. Apparel, Dollar General's smallest product category, improved sales by just over 2%, to $325 million.
  • Gross margin edged up by 20 basis points to 30.8%. Management cited reduced merchandise markdowns -- and higher initial markups on inventory -- as primary factors behind the slight improvement.
  • Selling, general, and administrative expense (SG&A) rose by 30 basis points to 22.5%, which management attributed to higher legal expense and store supplies expense, offset by reduced utilities costs and lower compensation expense as a percentage of sales.
  • The company engaged in share repurchases worth $185 million during the quarter. Total share repurchases through the first half of the fiscal year amount to $385 million.
  • Dollar General ended the second quarter with 15,836 stores compared to 15,015 units at the end of the second quarter of 2018. Total square footage at quarter-end of 117.2 million square feet represented a growth rate of 5.2% over the prior-year quarter.
Four rolled dollar bills on a grey background indicating a rising trend.

Image source: Getty Images.

What management had to say

Dollar General CEO Todd Vasos offered the following comments in the company's earnings press release on Thursday:

We are pleased with our second-quarter results, driven by strong performance on both the top and bottom lines. Our results this quarter were fueled by solid execution across many fronts, including category management, merchandise innovation, store operations, and continued progress with our strategic initiatives. In addition, we remained focused on disciplined cost control, which culminated in another quarter of strong earnings growth. Given our first-half performance and expectations for the remainder of the year, we are raising our full-year financial guidance.

Overall, we made solid progress on each of our key initiatives and believe we are well positioned to drive continued growth as we move ahead. Importantly, the strength of our second-quarter performance further validates our belief that we are pursuing the right strategies to create meaningful long-term shareholder value.

One of the more critical inferences shareholders should draw from this statement is that management is confident of continued operating leverage over the next few quarters. Even as sales have advanced in fiscal 2019, Dollar General has been able to hold both gross margin and operating margin steady, as we observed above. Thus, sales increases are dropping to the bottom line, boosting net earnings -- an attractive profile for a consumer staples stock in the current market environment. This phenomenon is one of the driving factors behind Dollar General's share price ascension in 2019.

Looking forward

Formidable results in the first two quarters have led to slightly revised earnings estimates for the full year. Dollar General raised its full-year revenue growth outlook from 7% to 8% while projecting annual same-store sales growth of roughly 3% against an earlier target of 2.5%.

On the earnings front, the organization now anticipates diluted EPS of $6.36 to $6.51 versus the prior expected range of between $6.30 and $6.50. Management noted that the earlier estimate did not include the impact of $31 million in "significant" legal expenses recognized in the second quarter. Finally, Dollar General reaffirmed its expected real estate activity for fiscal 2019, which includes 975 new store openings, 100 relocations, and 1,000 remodels of mature locations.