U.S. dollar-store giant, Dollar General (DG, Financial) reported its second quarter earnings on August 28. The results were slightly disappointing as the company’s quarterly revenue failed to match estimates. In addition, Dollar General’s proposal to acquire Family Dollar (FDO, Financial) also didn’t see a favorable response from the latter, but the Goodlettsville-headquartered company hasn’t given up on its chase. Crunching the quarter figures and looking into the management’s initiatives would give a better idea of where the company’s headed.
Revenue rises, but below expectations
Revenue increased 7.5% to $4.72 billion in the quarter from $4.39 billion reported in the 2013 second quarter. Analysts were expecting net sales to come in at $4.77 billion. Comparable store sales have continuously seen improvement in the past 26 quarters. In the past quarter the metric rose 2.1% year-over-year; however it was below analysts' estimate of 2.9% for the quarter. The improvement in the comp sales is attributable to the increase in store traffic and average ticket size.
In the quarter, the same store sales were strongest in May with year-over-year increase of more than 3.5%. However, this growth moderated in June and July when consumer spending witnessed a gradual fall as customers became cautious on their spending in the face of economic uncertainty and competitive environment. Strongest store sales were noticed in low margin consumables such as tobacco, candy, snacks and carbonated beverages that outpaced the non-consumables growth momentum. The company was happy with the solid growth in home products and apparel categories during the quarter.
For the quarter, the consumables sales improved 8.3%, seasonal sales was up by 3.1%, home products category showed 7.5% growth, and the apparel segment saw a 6.9% incline when compared with the year-ago period. Year-to-date, Dollar General opened 426 new stores and relocated 585 stores that supported the uptick in sales performance in the quarter.
Earnings meet analyst estimate
Though the company has been struggling to keep its margins intact as competition intensifies, the net income grew 2.4% to $251.3 million, or $0.83 per diluted share matching average analyst estimates.
Gross profit improved 6% this quarter, while gross margin as a percentage to sales decreased by 53 basis points to 30.8%. This compression in margin was primarily due to promotional markdowns, besides the effect of higher sales of low margin consumables like tobacco and perishables.
During the quarter, Dollar General also got engaged in promoting its product to keep up with the rising competition and maintain top line growth. However, spending on promotional activities resulted in compression of gross margin that reduced to 30.8% of sales compared with 31.3% reported last year same period.
Guidance adjusted, acquisition hopes still intact
As consumer spending is starting to show a prominent dip, Dollar General’s management seems unwilling to relinquish its bid for Family Dollar Stores. According to CEO, Rick Dreiling: “The volatility of the macroeconomic environment continues to pressure the consumer and impact the company's cost of purchasing and delivering merchandise.”
The top brass have thus lowered their same store sales guidance for the fiscal year ending January next year. Now the same store sales are expected to grow at 3% to3.5% for the fiscal year, from the previous forecast of 3% to 4%. However, as the company still remains optimistic on the Family Dollar transaction, it has maintained the sales growth outlook for the entire year at 8% to 9%.
Final thoughts
Dollar General’s growth trajectory might not be smooth going forward unless the acquisition of Family Dollar paves the future for the company. As of now, with no further clarity on the deal after the formal rejection by Family Dollar, the road ahead appears tough with other discount store giants trying to entice its consumers. The performance of Dollar General in the second quarter has not been impressive and the modified sales guidance by the management clearly demonstrates why Family Dollar is a ‘must-have’ deal to accelerate its sales momentum. Though its earnings are still in place, pressure building up from penny-pinching customers and the growing competition among discount chains can lead to drop in the net income in the upcoming quarters unless the company devises strategic moves.
