Dollar General (DG) Up 2.9% Since Last Earnings Report: Can It Continue?

It has been about a month since the last earnings report for Dollar General (DG). Shares have added about 2.9% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Dollar General due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Dollar General Q1 Earnings Surpass Estimates, Rise Y/Y

Dollar General Corporation reported better-than-expected first-quarter fiscal 2020 results, wherein both the top and the bottom line continued to improve year over year. Also, the company witnessed sturdy same-store sales performance. Management stated that change in consumer behavior due to the coronavirus pandemic had a favorable impact on the company’s performance.

Let’s Delve Deep

Quarterly earnings came in at $2.56 per share that comfortably surpassed the Zacks Consensus Estimate of $1.70 and increased significantly from $1.48 reported in the prior-year period. The year-over-year increase in the bottom line can be attributed to higher net sales and share repurchase activity. Notably, this was the fifth straight quarter of positive earnings surprise.

Net sales of $8,448.4 million increased 27.6% from the prior-year period and came ahead of the Zacks Consensus Estimate of $7,464.4 million for the eighth quarter in row. Contribution from new outlets and same-store sales growth favorably impacted the top line, partially offset by the impact of store closures.

Dollar General’s same-store sales increased 21.7% year over year primarily owing to rise in average transaction amount and customer traffic. Consumables, Seasonal, Apparel and Home categories favorably impacted the metric.

Sales in the Consumables category increased 28.6% to $6,703.4 million, while the same in Seasonal category witnessed a rise of 24.6% to $917.9 million. Home Products sales soared 32.6% to $498.3 million, while Apparel category sales grew 10.6% to $328.8 million.

Gross profit surged 29.6% to $2,595.7 million during the quarter under review. Notably, gross margin expanded 49 basis points to 30.7% mainly due to a reduction in markdowns and higher initial markups on inventory purchases. This was partly offset by increased distribution costs.

Meanwhile, operating income surged 69.2% to $866.8 million, whereas adjusted operating margin increased to 10.3% from 7.7% in the year-ago period.

Store Update

During the quarter under review, the company opened 250 new outlets, remodeled 481 stores (including 332 in the higher cooler count DGTP or DGP formats) and relocated 17 stores. In fiscal 2020, the company intends to open 1,000 new stores, remodel 1,500 stores, and relocate 80 stores.

Other Financial Details

Dollar General ended the quarter with cash and cash equivalents of $2,673.9 million, long-term obligations of $3,967.2 million and shareholders’ equity of $7,209.5 million. To improve its liquidity position, the company issued $1 billion of 3.5% Senior Notes due in 2030 and $500 million of 4.125% Senior Notes due in 2050. As of May 1, 2020, the company had $1.1 billion available under its revolving credit facility.

The company incurred capital expenditures of $195 million during the quarter under review. For fiscal 2020, it anticipates capital expenditures in the range of $925-$975 million. The company generated significant cash flow from operations during the quarter, totaling $1.7 billion, an increase of $1.2 billion or 202.4% from the year-ago period.

The company bought back 0.5 million shares for $63 million during the quarter. However, management has temporarily suspended share repurchase program considering the current scenario. Notably, the company still had $1.1 billion remaining under authorization at the end of the quarter.

Key Notes

Although management withdrew its fiscal 2020 guidance issued on Mar 12, it still expects the company to surpass the same. The company had earlier projected an increase of 10% in earnings per share on a year-over-year basis. It had guided net sales growth of 7.5-8% and same-store sales increase of 2.5-3% for the fiscal year.

Dollar General also informed that since the end of the first quarter, it has continued to witness “elevated demand” across its stores. Since the end of Q1 and through May 26, same-store sales have risen roughly 22% compared with prior-year period.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended upward during the past month. The consensus estimate has shifted 17.49% due to these changes.

VGM Scores

Currently, Dollar General has a great Growth Score of A, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Dollar General has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.

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