The main story in the retail sector during this earnings season has been the extreme winter weather weighing on store traffic. Teen fashion retailers were among the worst affected, as many of the companies in the industry weren't doing too well to begin with. Now, Dollar General (NYSE:DG) has come out with a rather poor report for the period, blaming poor weather, a weak consumer spending environment, and a cutthroat discounting wave across retail.
What can we learn from the report?
Trouble for retailers
First, let's take a closer look at Dollar General's fourth-quarter report. It was something of a mixed bag, with earnings per share coming in at $1.01 for a 1.5% rise year over year but missing the consensus by $0.01. Revenue rose a healthy 6.8% to $4.49 billion, but missed analyst expectations of $4.62 billion. Margins contracted a bit, while same-store sales came in a little weak, with only a 1.3% growth rate.
These numbers weren't so bad, and as such, it was probably the poor outlook that had investors worried, missing analyst expectations for both the next quarter and the coming full year. For the first quarter, the company is projecting earnings between $0.72 and $0.74, while analysts were hoping for $0.81. For the full year, the company expects to earn between $3.45 and $3.55, also well below the $3.69 consensus as polled by Thomson Reuters. Full-year sales are expected to grow by 8% to 9%, with a 3% to 4% increase in same-store sales.
The report comes after news that Wal-Mart (NYSE:WMT), the world's largest retailer, will be moving into Dollar General's space. With growth clearly slowing at Wal-Mart's supercenters, the company is looking toward its smaller shops, which means moving into a retail arena currently dominated by Dollar General and its competitors. While this is probably good news for Wal-Mart, it is worrying for Dollar General.
A bright spot
One of the bright spots in the report was tobacco sales, merchandise the company has only recently decided to carry. In fact, without tobacco, same-store sales would have been flat over the period. While tobacco is generally not a high-margin product, dollar stores have been able to benefit from the fact that shoppers coming in for smokes usually buy other goods as well.
One of the country's largest drugstore chains, CVS Caremark (NYSE:CVS), caused quite a stir when it decided to stop selling cigarettes and tobacco last year. According to management, selling cigarettes was not consistent with the company's objectives, which aim to improve the health of their customers.
CVS Caremark is the first American drugstore chain to make this decision, and it was widely cheered in the media. Walgreen seems unruffled by CVS' landmark tobacco call and has continued to sell cigarettes. In any case, the move presents significant opportunities for dollar and convenience stores, as they should gain more traffic from smokers.
The bottom line
Dollar General's most recent report came in below analyst expectations on most metrics, citing poor weather and weak consumer spending as the prime culprits. Also, the outlook did little to inspire investors, coming in well below the analyst consensus. Increased competition from Wal-Mart will be another challenge for dollar stores, but following CVS' decision to stop selling tobacco, cigarette sales may prove to be a lucrative avenue for growth.