Shares of Tennessee-based discount merchandise retailer Dollar General (DG 105.60, -6.10) shed 5.5% in reaction to the company’s fiscal year 2018 guidance cut.
Quite simply, the impetus for the guidance trim resulted from third quarter hurricanes and other disasters, which has caused Dollar General to record greater-than-anticipated expenses in the second half of 2018. In total, the impact to third quarter EPS was an estimated $0.05 per diluted share, and Dollar General expects to see an additional estimated $0.04 impact on its fourth quarter diluted EPS. The company has therefore adjusted its full-year outlook to reflect the estimated $0.09 impact of these events, ongoing transportation cost pressures and year-to-date results.
Specifically, Dollar General updates FY18 guidance as follows:
- The company expects net sales growth to be around 9.0%, compared to the previous range of 9-9.3%, and expects same-store sales growth to be in the middle of the previous range of mid-to-high two percent.
- Dollar General expects its fiscal 2018 operating margin rate to be modestly below that of fiscal year 2017. This compares to the previous guidance of a relatively unchanged operating margin rate in fiscal year 2018 compared with the prior year.
- Diluted EPS is expected to be between $5.85-6.05, below previous guidance for diluted EPS in the range of $5.95-6.15. This diluted EPS guidance assumes an effective tax rate in the range of 21-22% compared with the lower end of the 22-23% range that the company previously provided.
- The company continues to anticipate a cash benefit of about $300 mln in fiscal year 2018 as a result of the TCJA.
- In addition, management expects share repurchases for fiscal year 2018 to be a minimum of $850 mln and is narrowing its expectations for capital expenditures for fiscal year 2018 to a range of $725-775 mln, compared to its previous range of $725-800 mln.
- Dollar General also reiterates plans to execute about 2,000 real estate projects, including 900 new store openings, 1,000 mature store remodels, and 100 store re-locations.
Management also offered a preliminary store growth outlook for 2019. Specifically, Dollar General plans to execute about 2,075 real estate projects, including 975 new store openings, 1,000 mature store remodels, and 100 store relocations.
Swinging back to the third quarter print, Dollar General
earnings per share of $1.26, including an estimated $0.05 net-negative impact
from hurricane-related expenses and greater-than-anticipated other
disaster-related expenses, though management also noted that the third quarter
of 2017 also included an estimated $0.05 hurricane-related net negative impact.
Net sales grew 8.7% to $6.4 bln, positively affected by sales contributions from new stores and growth in same-store sales, but modestly offset by the impact of store closures. Same-store sales increased 2.8% from the third quarter of 2017, driven by an increase in average transaction amount and positive results in the consumables, seasonal, and home categories, partially offset by sales declines in the apparel category. The company highlighted that customer traffic was essentially flat.
Gross profit came in slightly below market expectations at 29.5%, an overall decline of 39 basis points. The gross profit rate decrease was primarily attributable to an increase in the LIFO provision, a greater proportion of sales coming from the consumables category, which generally has a lower gross profit rate than other product categories, sales of lower margin products comprising a higher proportion of sales within the consumables category, higher markdowns, and increased transportation costs. These factors were partially offset by an improved rate of inventory shrink.
In short, Dollar General’s guidance cut and its slightly worse than expected margins offered a difficult comparison given hurricane and LIFO expenses. Last week, peer Dollar Tree/Family Dollar (DLTR 85.77, -0.90, -1.0%) saw its stock rise following its third quarter beat but admittedly, too, offered underwhelming guidance. Into the print shares of DG held a 20.1% YTD advance, but with today’s losses, the stock now stands below the 50-day simple moving average (109.65).