Dollar General (DG 1.11%) was a major resource for consumers seeking to keep their houses stocked during the COVID-19 pandemic. That was the main takeaway from the retailer's first-quarter report, which showed soaring sales and a tripling of operating cash flow.
Meanwhile, management pulled its 2020 outlook this week because of the intense volatility they're seeing in daily sales trends. Yet the positive momentum has carried into the beginning of the chain's second quarter.
Let's take a closer look.
Image source: Getty Images.
Handling unprecedented volume
Investors were expecting to see strong growth as most of the chain's 16,000 stores remained open through stay-at-home orders to fulfill spiking demand for home essentials like cleaning supplies, food, and snacks.
Dollar General didn't disappoint. Sales jumped 22% at existing locations, which helped push revenue higher by 27% to $8.5 billion. "These are certainly unprecedented times," CEO Todd Vasos said in a press release while explaining that shoppers turned to its stores for consumer staples.
Dollar General benefited from higher customer traffic and increased spending per visit, which set it apart from bigger rivals like Walmart (WMT 1.60%). The retailing giant recently announced surging average spending but decreased traffic as key components of its 10% comparable-store sales boost in Q1.
Surging profits
Dollar General's business also shined on the financial side of the ledger. Gross profit margin improved to 30.7% of sales from 30.2%, and selling expenses dove to 20.5% of sales from 22.5% a year ago. Walmart's comparable metrics each declined slightly.
Dollar General did see elevated costs related to COVID-19, including higher wages and cleaning expenses. But the soaring sales volume more than offset that punch. It also helped that Dollar General focuses its sales more toward staple products like home cleaning supplies, while Walmart carries a bigger apparel section, which was a burden through the early days of the pandemic.
That financial strength trickled right down to the bottom line, with operating cash flow jumping over 200% to $1.7 billion compared to Walmart's 100% increase. Dollar General's net income landed at $650 million, or 7.7% of sales, compared to $385 million, or 5.8% of sales, last year.
Volatility ahead
Dollar General pulled its 2020 outlook, just like Walmart did early this month. But the chain made a few comments that suggest ongoing positive momentum. Management said demand has been high through late May, "albeit with slightly more variability and some moderation in recent days." Comps have been running at a 22% increase since the start of the fiscal second quarter on May 2, the company revealed.
That improvement makes it likely the retailer will see significant growth for the full year, although the actual rate will depend on major variables like economic growth and the path of the novel coronavirus through the fall and winter months. Executives had been predicting comps of roughly 3% before the pandemic hit.
While those risks convinced management to pull their 2020 guidance, Dollar General is moving full speed ahead with its broader growth plans. The chain will spend between $925 million and $975 million on initiatives including new store openings and remodels this year.
Thanks to its performance during peak COVID-19 social distancing measures, management has plenty of resources to dedicate to those projects. Dollar General also has the biggest sales platform it has ever enjoyed as it targets a 31st straight year of comp growth in 2020.
