Shares of discount-retail chain Dollar General (DG -0.80%) surged higher on Thursday after the company reported financial results for the first quarter of 2022. Despite slumping sales growth, management is forecasting resilient profits, which is exciting for investors. As of 10:15 a.m. ET, Dollar General stock was up 13%.
In Q1, net sales for Dollar General were only up 4.2% from the same quarter of 2021 and this increase was mostly the result of having more stores than last year. Same-store sales, a metric that tracks sales at stores that were already open last year, were actually down 0.1% year over year.
Dollar General's diluted earnings per share (EPS) fell 14.5% year over year to $2.41 in Q1. More customers are buying consumables (like food and drink) than this time last year, and these items generally come with a lower gross profit margin, which negatively impacted the company during the quarter. Moreover, higher labor costs are boosting operational expenses and hurting its bottom line.
While Q1 results might not sound too impressive, Dollar General is pleasing investors with its forecast. For the year, it expects to grow EPS 12% to 14% from 2021. Some of this will come from having an extra week this year compared to last year. But it plans to grow sales by continuing its robust new-store pipeline, reducing its share count by repurchasing shares, and getting operational expenses under control.
But perhaps the biggest reason Dollar General stock is up today is market sentiment. Before today's pop, the stock was down about 20% over just the past month as rival retail chains sounded the alarm on inflation and a potential recession. But by maintaining its previous financial guidance, Dollar General is bucking a trend and causing investors to rethink their recent pessimism for this business.