Dollar General Corporation (DG) reported lower-than-expected third-quarter fiscal 2014 results. Adjusted earnings of 79 cents per share fell a penny short of the Zacks Consensus Estimate but rose 9.7% from the year-ago period.
Similarly, net sales of this Zacks Rank #2 (Buy) stock increased 7.8% to $4,724.4 million but came below the Zacks Consensus Estimate of $4,758 million. However, the company stated that it remains “committed” to buy Family Dollar Stores Inc. (FDO).
Sales in the Consumables category jumped 8.4% to $3,645 million; the Seasonal category witnessed a 3.7% rise in sales to $524.6 million, while Home products sales increased 8% to $298.9 million. Sales in the Apparel category grew 8.2% to $255.9 million. Consumables category sales continue to improve, primarily buoyed by strong sales of tobacco products, perishables, and candy and snacks.
Consistently increasing traffic and average transaction value led to 2.8% growth in comparable-store sales.
Gross profit increased 7.2% to $1,423.7 million, while gross margin contracted 18 basis points to 30.1% due to higher sales of low margin products like consumables. Higher markdowns also hampered margins. Operating profit grew a mere 1% to $394.1 million; however, operating margin fell about 57 basis points to 8.3%.
Facing stiff competition from Wal-Mart Stores Inc. (WMT) and Target Corp. (TGT), Dollar General has been offering compelling prices in order to retain its customer base, which has resulted in decreasing margins. With increasing competition, consolidation is now the demand of time in the race of the survival of the fittest.
After Family Dollar rejected Dollar General’s $9.7 billion bid citing difficulties to overcome antitrust regulatory concerns, the latter took its bid directly to the shareholders. The company will update on the development before the Family Dollar shareholders’ meeting which is on Dec 23, 2014.
Other Financial Details
Dollar General ended the quarter with cash and cash equivalents of $216.2 million, long-term obligations of $2,666 million and shareholders’ equity of $5,343.6 million.
The company incurred $289 million in capital expenditures during the first nine months of fiscal 2014. Management now projects capital expenditures to be around $400 for the fiscal as against $450 million to $500 million projected earlier. This is due to shift in timing of construction of a new San Antonio, TX distribution center as well as reduced expenditures for new stores.
The company did not repurchase any shares in the quarter under review. It bought back 14.1 million shares for $800 million during the first nine months of fiscal 2014. Since the commencement of the share repurchase program in Dec 2011, the company has bought back 44.5 million shares aggregating $2.3 billion. The company still has $223.4 million remaining under its current share repurchase authorization, as of Oct 31, 2014.
Stores Update
Dollar General opened 617 new outlets, while closing 34 stores during the first nine months of fiscal 2014, thereby bringing the total store count to 11,715. The company’s plan is to open about 700 new stores and relocate or remodel around 500 stores through fiscal 2014. Further, the company expects to finish about 400 life cycle remodels by year-end.
In fiscal 2015, the company plans to open 730 stores and complete 875 life cycle remodels.
Guidance
Dollar General now expects its fiscal 2014 earnings to be somewhere in the middle of the previously predicted range of $3.45 and $3.55 per share. The current Zacks Consensus Estimate of $3.50 dovetails with the company’s guidance range.
For fiscal 2014, total sales are expected to rise 8% as against earlier projection of 8% to 9% year-over-year increase, while comparable-store sales are expected to be at par or decrease marginally from the its previously guided range of 3% to 3.5%. Comparable-store sales are expected to increase 5% in the fourth quarter.
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