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Dollar General (DG) Up 3.5% 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 3.5% 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 drivers.

Dollar General’s Q2 Earnings Beat Estimates, Comps Rise

Dollar General Corporation registered a stellar performance in second-quarter fiscal 2020, wherein both the top and the bottom lines not only beat the Zacks Consensus Estimate but also grew year over year. The discount retailer also 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.

The company informed that since the end of the second quarter, it has continued to witness “elevated demand” across its stores. Consequently, from Aug 1 through Aug 25, same-store sales have risen roughly 15% compared with prior-year period.

Let’s Delve Deep

Quarterly earnings came in at $3.12 per share that comfortably surpassed the Zacks Consensus Estimate of $2.44 and increased significantly from $1.74 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 sixth straight quarter of positive earnings surprise.

Net sales of $8,684.2 million increased 24.4% from the prior-year period and came ahead of the Zacks Consensus Estimate of $8,328.2 million for the ninth 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 18.8% year over year primarily owing to rise in average transaction amount, partly offset by a decline in customer traffic. Consumables, Seasonal, Apparel and Home categories favorably impacted the metric.

Sales in the Consumables category increased 19.7% to $6,496.4 million, while the same in Seasonal category witnessed a rise of 36% to $1,161.6 million. Home Products sales soared 56.2% to $586 million, while Apparel category sales grew 35.6% to $440.3 million.

Gross profit surged 31.1% to $2,818.2 million during the quarter under review. Notably, gross margin expanded 167 basis points to 32.5% mainly due to higher initial markups on inventory purchases, a significant percentage of sales coming from non-consumables product categories and a reduction in markdowns. This was partly offset by higher distribution and transportation expenses.

Meanwhile, adjusted operating income surged 71.3% to $1,042.6 million, whereas adjusted operating margin increased to 12% from 8.7% in the year-ago period.

Store Update

During the 26-week period ended on Jul 31, the company opened 500 new outlets, remodeled 973 stores (including 704 in the higher cooler count DGTP or DGP formats) and relocated 43 stores. The company also added produce in more than 120 stores, bringing the total number of stores, which carry produce to over 870. In fiscal 2020, the company now intends to open 1,000 new stores, remodel 1,670 stores, and relocate 110 stores.

Other Financial Details

Dollar General ended the quarter with cash and cash equivalents of $2,959.6 million, long-term obligations of $4,089 million and shareholders’ equity of $7,356.1 million. The company incurred capital expenditures of $424 million during the 26-week period ended on Jul 31. For fiscal 2020, it anticipates capital expenditures in the range of $1-$1.1 billion versus prior projection of $925-$975 million.

Dollar General resumed share repurchases during the second quarter, after temporarily suspending the same in the preceding quarter in order to assess the implications of the pandemic. Notably, the company bought back 3.2 million shares for $602 million during the quarter. The company still had $481 million remaining under authorization at the end of the quarter. Also, the company’s board of directors increased the share repurchase authorization by $2 billion on Aug 26, 2020. The company expects to repurchase shares worth $2.5 billion during fiscal 2020.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in estimates revision. The consensus estimate has shifted 14.21% due to these changes.

VGM Scores

Currently, Dollar General has a strong Growth Score of A, though it is lagging a bit on the Momentum Score front with a B. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% 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. Notably, Dollar General has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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