With new owners preparing to come on board, Dollar General (NYSE:DG) cleared out the dust bunnies from its stockrooms. Not only did the deep discounter mark down and sell off more than half of the $300 million in inventory it had on hand as a result of a change in its inventory practices, but it also shuttered a third of the stores it wants to jettison from its operations by the end of the calendar year.
The spit-and-polish actions took a huge swipe from earnings, which dropped 66% from the year-ago period. Although same-store sales climbed more than 5.8% and sales rose 3% to $2.6 billion, profits were only $50 million, or $0.16 per share, because of the restructuring charges. Because of all the large markdowns, gross profits contracted 420 basis points.
Dollar General is the largest of the so-called dollar stores, with some 8,000 locations. Unlike 99 Cents Only (NYSE:NDN) and Dollar Tree (NASDAQ:DLTR), which typically only sell products for a dollar or less, Dollar General sells goods that can run as high as $10 or so. Private equity investor Kohlberg Kravis Roberts offered to buy the discount chain for $7.3 billion, or around $22 per share. So even though the company reported depressed results for the quarter, it didn't do much to budge the stock from those valuations.
It's not surprising that shareholders are loath to cheapen their shares by selling off for less. KKR is willing to buy Dollar General for about 25 times normalized earnings and about 11 times EBITDA (earnings before interest, taxes, depreciation, and amortization). Family Dollar (NYSE:FDO) and Dollar Tree, for example, trade at 19 and 18 times earnings, respectively, and the industry trades at around eight times EBITDA. When you've got someone willing to pay dear, there's little reason to stop him.
Undoubtedly, Dollar General is clearing the decks and sprucing up the place in anticipation of KKR taking over. Taking a big bath now will mean the books will be much cleaner for the new owners, so shareholders shouldn't expect any improvements in results or margins in the coming quarters. There is still a lot of inventory that needs to be sold off and several hundred stores that still need to be closed. All will undoubtedly be completed before the third quarter, when the General is demoted to buck private.
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Family Dollar is a Stock Advisor recommendation.
Fool contributor Rich Duprey does not own any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.
