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Dollar General's (DG) Q3 Earnings Beat Estimates, Comps Rise

Dollar General Corporation DG put up a stellar performance in third-quarter fiscal 2020, wherein both the top and the bottom line 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. Owing to the ongoing uncertainties, management did not provide any updated view for fiscal 2020.

Meanwhile, the company has been progressing well with its strategic initiatives. These include the rollout of DG Pickup at nearly its entire store base and the launch of its latest store format, pOpshelf. It also unveiled plans to pay nearly $50 million in additional appreciation bonuses to the eligible frontline associates in fourth-quarter fiscal 2020. In fact, management expects awarding nearly $173 million to store, distribution center and private fleet staff during the current fiscal.

Impressively, shares of this Zacks Rank #3 (Hold) company have advanced 40.6% so far this year compared with the industry’s rally of 24.7%.

Let’s Delve Deep

Quarterly earnings came in at $2.31 per share that comfortably surpassed the Zacks Consensus Estimate of $1.99 and increased 62.7% from $1.42 reported in the prior-year period. The year-over-year increase in the bottom line can be attributed to higher net sales and margins. Notably, this was the seventh straight quarter of a positive earnings surprise.

Net sales of $8,199.6 million increased 17.3% from the prior-year period and surpassed the Zacks Consensus Estimate of $8,139 million for the tenth quarter in a row. Contribution from new outlets and same-store sales growth favorably impacted the top line, modestly mitigated by the impact of store closures.

Dollar General’s same-store sales grew 12.2% year over year, primarily owing to a rise in average transaction amount, partly offset by lower customer traffic. Notably, consumables, seasonal, home products and apparel categories favorably impacted the metric. Among these categories, home products registered the highest increase. Also, consumer behavior driven by the pandemic significantly benefitted net sales and same-store sales. Since the end of the reported quarter, it has been witnessing elevated demand across its stores. Hence, same-store sales rose around 14% from Oct 31 through Dec 1, 2020.

Sales in the Consumables category increased 15.6% to $6,385.3 million, while the same in Seasonal category witnessed a rise of 20.7% to $906.6 million. Home Products sales soared 29% to $517.1 million, while Apparel category sales grew 23.4% to $390.5 million.

Dollar General Corporation Price, Consensus and EPS Surprise

 

Dollar General Corporation price-consensus-eps-surprise-chart | Dollar General Corporation Quote

Gross profit jumped 24.4% to $2,568.2 million during the quarter under review. Notably, gross margin expanded 178 basis points (bps) to 31.3%, mainly due to lower markdowns and inventory shrink, both as a rate of net sales coupled with higher initial markups on inventory purchases and a significant proportion of sales from the non-consumables product categories. These were partly offset by higher distribution and transportation expenses.

Meanwhile, selling, general and administrative expenses, as a rate of net sales, fell 62 bps to 21.9% in the quarter. Further, operating income surged 57.3% to $773.1 million, whereas adjusted operating margin increased to 9.4% from 7% in the year-ago period.

Store Update

During the 39-week period ended on Oct 30, the company opened 780 new outlets, remodeled 1,425 stores and relocated 76 stores. In fiscal 2020, the company expects to execute 2,780 real estate projects, comprising 1,000 store openings, 1,670 remodels and 110 relocations.

For fiscal 2021, management plans to carry out 2,900 real estate projects. This includes 1,050 store openings, 1,750 remodels and 100 relocations. It expects to execute an average of about eight real estate projects per day in fiscal 2021, given its robust pipeline.

Other Financial Details

Dollar General ended the quarter with cash and cash equivalents of $2,199.4 million, long-term obligations of $4,131.6 million and shareholders’ equity of $6,985.5 million. As of Oct 30, 2020, total merchandise inventories, at cost, came in at $5,025.8 million, up 5.9% on a per-store basis from the year-ago period.

The company incurred capital expenditures of $698 million during the 39-week period ended on Oct 30. For fiscal 2020, it continues to anticipate capital expenditures in the range of $1-$1.1 billion.

Notably, the company bought back 4.4 million shares for $902 million during the reported quarter. The company had $1.6 billion remaining under authorization at the end of the quarter. The company continues to expect repurchasing shares worth $2.5 billion during fiscal 2020.

On Dec 2, 2020, the company’s board announced a quarterly cash dividend of 36 cents a share, payable on or before Jan 19, 2021, to shareholders as on Jan 5.

3 Hot Stocks to Consider

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L Brands LB, also a Zacks Rank #1 stock, has a long-term earnings-growth rate of 13%.

Target TGT has a long-term earnings-growth rate of 7.1% and a Zacks Rank #2 (Buy).

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