National discount retailer Dollar General (NYSE:DG) continued to combine sales momentum with cost control in its latest earnings period. Fiscal third-quarter 2019 results revealed healthy growth in same-store sales and total revenue, both on a year-over-year and sequential basis. Management nudged up earnings guidance for the year, announced a new share repurchase authorization, and forecast a busier real estate project schedule for the upcoming fiscal year. Shareholders appeared to appreciate the confident outlook and bid up shares of the consumer staples giant by 1.5% in midmorning trade on Thursday.

Note that all comparative numbers that follow refer to those of the prior-year quarter.

Dollar General: The headline numbers

Metric Q3 2019 Q3 2018 Change
Revenue $6.99 billion $6.42 billion 8.9%
Net income $365.6 million $334.1 million 9.4%
Diluted EPS $1.42 $1.26 12.7%

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

Highlights from the quarter

  • The company's year-over-year revenue increase of 8.9% improved on the 8.4% top-line advance recorded in the fiscal second quarter of 2019.
  • Same-store sales expanded by 4.6%, a crisp result that also accelerated against the previous sequential quarter's 4% growth. Management attributed the current period's gain to increased traffic and larger average transaction size, as well as growth in the home, consumables, apparel, and seasonal merchandise categories.
  • Gross margin was essentially flat at 29.5%.
  • Dollar General controlled overhead expenses during the quarter, as selling, general, and administrative expense (SG&A) declined 13 basis points as a percentage of sales, to 22.5%. The company incurred $14 million of hurricane-related costs in the prior-year quarter. In addition to this favorable comparison, management cited lower labor costs and slimmer store supplies expense as factors in the decrease in SG&A. These were partially offset by climbing utility costs.
  • Rising sales coupled with a stable gross margin and discipline over operating expenses provided the company with operating leverage in the third quarter: Operating margin increased by 14 basis points to 7.03%.
  • The organization added 258 net new locations over the last three months, bringing its store count to 16,094 units. Total retail space of roughly 118 million square feet at quarter-end represents year-over-year growth of 5.6%.
  • Management has avidly repurchased company shares in fiscal 2019. The dollar chain bought back $400 million of its common stock in the third quarter and has repurchased $785 million worth of its shares year to date. On Dec. 3, its board added $1 billion to the $561 million remaining under its current, nonexpiring share repurchase authorization.
Close-up of a man pulling two one-dollar bills from a wallet.

Image source: Getty Images.

Management's comments

In Dollar General's earnings press release, CEO Todd Vasos focused his commentary on the company's rising pace of sales and earnings expansion:

We are pleased with another quarter of strong performance across the business. The quarter was highlighted by our best customer traffic and same-store sales increases in nearly five years, as well as double-digit growth in both operating profit and diluted EPS. We continue to execute well on many fronts, while maintaining our focus on delivering value and convenience for our customers.

Vasos also touched on the retailer's real estate project slate for fiscal 2020:

We are excited to accelerate our real estate growth plans in 2020. We continue to see a significant number of opportunities to serve more customers and communities with our innovative mix of store formats. The sustained positive results we are seeing from our portfolio of real estate projects further validates our belief that our ongoing investment in high-return real estate projects, along with our strategic initiatives, is the best use of our capital as we look to continue delivering long-term shareholder value.

Dollar General is on track to complete 2,075 real estate projects in the current fiscal year, including 975 new units, 1,000 remodels of aging stores, and 100 store relocations. For fiscal 2020, management has outlined a more ambitious schedule and aims to complete 2,580 real estate projects, comprising 1,000 new stores, 1,500 renovations, and 80 store relocations.

Higher guidance to close out the year

Heading into the fourth quarter of fiscal 2019, management made several small tweaks to full-year earnings projections. Net sales expectations have been adjusted from "approximately 8%" to the "low 8% range" (i.e., sales growth of just over 8%). Same-store sales growth is now anticipated to land in the "mid-to-high 3% range," versus the prior expectation for growth in the "low-to-mid 3% range." Management has chalked in operating profit growth of 6% to 8%, an improvement on the previous estimate of 5% to 7%. Finally, on the bottom line, Dollar General is now poised to generate full-year diluted EPS of $6.46 to $6.56 against an earlier target of $6.36 to $6.51.

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