Even in the face of higher tariffs and the impact from significant legal expenses due to several class-action lawsuits, Dollar General (NYSE:DG) reported higher sales and profits in the second quarter that beat analyst expectations.

Its business also has sufficient momentum behind it that the deep discounter was able to raise its full-year guidance for 2019, showing that the value proposition offered by dollar stores overall and Dollar General in particular remains as vital as ever.

Hand holding five one dollar bills

Image source: Getty Images.

Consumables are key

Dollar General said sales jumped 8.4% to $7 billion, outpacing the 7% gain Wall Street expected. That was powered by a 4% rise in comparable-store sales, the fifth consecutive quarter the retailer posted flat or positive gains and handily trouncing analyst forecasts of just a 2.4% gain. Comps were lifted by more transactions and greater customer traffic, leading to adjusted earnings of $1.74 per share, well above the $1.57 per share analysts looked for.

The outsized performance this quarter was driven once again by the availability of more consumable items. In the new stores Dollar General opens, as well as in those it remodels, refrigerator cases and fresh produce are a primary feature, and they're resonating with customers. Yet produce also carries lower margins than other goods, so it does apply pressure to profits. But the deep discounter was still able to surmount that hurdle as seasonal and home categories more than made up for it.

The one area that Dollar General has found really challenging is apparel -- comps fell in the segment once again even as the dollar amount rose. Still, it's the smallest category, with sales accounting for less than 5% of the total, indicating the weakness won't impede the deep discounter's progress.

New and better stores

The dollar store chain is almost halfway to its goal of opening 1,000 new stores this year after opening 249 this quarter. It also remodeled 323 other stores in the period, bringing to 653 the number of locations that have been updated, closing in on the nearly 1,000 stores it wants to redo.

The remodels are just as important as the new stores because Dollar General found that with a traditional remodel, comps rise on average by 4% to 5%, but in what it calls its Dollar General Traditional Plus remodel -- where the stores have 34 higher-capacity cooler doors on average -- comps jump anywhere from 10% to 15%.

One-time expenses weigh on results

The deep discounter did have some large one-time expenses related to class-action lawsuits that were filed against it. It's alleged Dollar General sold motor oil that was obsolete and past its expiration date, which the retailer denies. It also faces a class-action lawsuit over its stores not being compliant with the Americans With Disabilities Act because a wheelchair-bound woman found it difficult to navigate the stores' narrow aisles. Legal expenses amounted to $31 million this quarter, which swiped nearly 6 percentage points of growth from operating profits.

These are largely one-time items, so the underlying business isn't affected, but increased tariff costs could be longer lasting. Dollar General says it's facing not only the impacts of the duties that were raised in May, but also hikes that are coming on Sept. 1, Oct. 1, and Dec. 15.

Still a brighter future

Even so, the retailer believes it will be able to mitigate the tariffs and is including their impact in its new guidance, which sees:

  • sales rising 8% compared with its previous expectation of a 7% increase;
  • comps gains in the low- to mid-3% range versus its prior outlook of 2.5%;
  • and EPS of $6.36 to $6.51, compared with the $6.30 to $6.50 range it offered before.

Excluding legal expenses, it anticipates earnings of $6.45 to $6.60 per share.

Dollar General has taken command of the deep-discount space and issued marching orders to grow its business broadly. Its troops seem to be responding, and there's no reason to think it won't be able to conquer new heights from here.

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