Despite an increase in overall consumer spending, an uptick in consumer sentiment, and lower oil prices, there are some retailers who continue to face problems and their performance is not up to the mark. For instance, Dollar General (DG, Financial) reported its third quarter numbers which failed to meet the Street's estimates, sending its share prices down. Let's take a look.
An overview of the quarter
Revenue for the quarter surged 7.8% to $4.72 billion, as compared to the previous year. However, analysts' estimates were higher at $4.76 billion. The top line was driven by higher average transaction value and increased traffic at its stores, resulting in a same store sales growth of 2.8%. Comp sales during the quarter was higher than that of the previous quarter, wherein same store sales grew 2.1% only.
The retailer has opened 617 new outlets since the beginning of the year. Also, it shut down 34 stores during the same time period. Thus, the new stores added to the revenue base and should continue to do so in the future. Furthermore, Dollar General plans to open a total of 700 stores in 2014 as well as remodel 500 stores.
Higher demand for products such as the perishables, tobacco products and snacks led to higher sales. Tobacco has been a key driver for revenue growth of the company. However, such products affect the margins of the company, which shrank by 18 basis points to 30.1% during the quarter. Earnings stood at $0.79 per share as against the estimate of $0.80 per share.
By the segments
Going by the segmental performance of the company, the Consumables category rose 8.4% to $3.65 billion, driven by higher demand for tobacco and perishables. Revenue from the seasonal category grew 3.7% to $524 million, over last year. The Home products segment rose 8% to $300 million. The apparel category grew 8.2% to $256 million. Thus, the retailer registered growth across all the segments.
Furthermore, Dollar General plans to acquire Family Dollar Stores (FDO, Financial) in order to expand its footprint. However, even peer Dollar Tree is eyeing the same acquisition. If Dollar General is able to acquire the company, it will be able to grow manifold.
Further, it plans to open 730 new stores and remodel 875 stores in 2015. Thus, the dollar store is making efforts to grow through expansion in new regions and increasing its store network.
The company also reiterated its guidance for the year, wherein it expects the top line to surge 8% and earnings to be in the range of $3.45 per share and $3.55 per share. However, comp sales are estimated to be lower than before at around 3%.
The challenge
Dollar General faces stiff competition from big box retailers and online retailers such as Walmart (WMT, Financial) and Amazon (AMZN, Financial). Walmart is one of the growing players and provides tough competition to the dollar stores. Its smaller format stores have been very successful and it has recently introduced a saving catcher program, which shows the prices, of the purchased products, offered by the peers in the bill of the customer. This helps customers in comparing the pocket pinch.
Summary
Even Dollar General needs to strengthen itself on the marketing front so that it can attract more and more customers. The company registered a blockbuster quarter, expanding its footprint and is growing its business. Moreover, its potential acquisition will help in growing further. Overall, this dollar store looks like a safe bet for the future.
