Dollar General (NYSE:DG) will report earnings on Tuesday morning, so investors want to know today whether the company's shares will be marching north or south. My guess is that Dollar General is heading down Dixie way.
Dollar General reported its sales results for the quarter earlier this month, saying that total retail sales increased 9.5% to $2.1 billion, versus $1.9 billion one year ago. So far, so good. However, the company also revealed that same-store sales for locations open more than a year increased just 1%. Although that's better than the 1% decline in comps reported by rival Dollar Tree (NASDAQ:DLTR) earlier this month, it hardly calls for a tickertape parade. Back in August, Dollar General wrapped up its report on 1H 2005 results by giving guidance for the rest of this fiscal year. In that guidance, Dollar General predicted that same-store sales would increase 1%-3% in Q3 (and 2%-4% in Q4). Thus, the 1% sales rise already suggests that the company's earnings results should fall toward the shallow end of its $0.19- to $0.21-per-share profits guidance.
But that's only one-third of the story. Part two goes like this: Dollar General warned that high fuel costs would compress its gross margins in Q3, because that's when "the Company has its heaviest number of shipments in preparation for the holiday season." OK, nothing new there -- this is a seasonal phenomenon, and hardly unexpected. But when Dollar General made that statement, it didn't expect three massive hurricanes to drive gasoline and diesel prices through the roof. Combine the company's general fuel-cost observation with the higher-than-expected cost of fuel in Q3, and it looks even more likely that Dollar General will see its profits fall toward or below the low end of its earnings guidance.
Part three: If any cavalry could ride to the General's rescue tomorrow, it would have to come via share buybacks. By dividing companywide earnings among fewer shares outstanding, Dollar General could magnify its earnings per share. Back in August, Dollar General noted that it had a million shares to go in its buyback plan. That authorization was later expanded by a further 10 million shares, because in Q3 proper, the company bought back its remaining allotment of 1 million authorized shares.
However, I expect that this cavalry will prove too little and too late to save the General's day. With a share count of 321 million, the million shares repurchased in Q3 can only have shaved 0.3% off Dollar General's shares outstanding. That won't provide enough of a boost to counteract a significant compression in companywide margins.
For more Foolish views on the dollar-store industry, read:
Dollar Tree is a recommendation of Motley Fool Inside Value.
Fool contributor Rich Smith does not own shares of any company named above.
