Dollar General’s Consumables Sales Drive Growth

Retailer’s same-store sales grew 0.7% due to higher transaction amount despite lower traffic

dg1Discount retailer Dollar General Corporation (NYSE: DG) announced its Q2 FY16 and H1 FY16 financial results on August 25th, 2016.

The Goodlettsville, Tennessee-based Company offers a selection of merchandise, including consumables, seasonal, home products and apparel, as well as seasonal products such as decorations, toys, batteries, small electronics, greeting cards, stationery, prepaid phones and accessories. Its merchandise includes national brands from manufacturers, as well as private brand selections.

The Company operates approximately 12,575 stores that are located in over 43 states, with a majority of them concentrated in the southern, southwestern, Midwestern and eastern U.S. Its stores average approximately 7,400 square feet of selling space. Its stores are supported by over 13 distribution centers located strategically throughout its geographic footprint. Read more about Dollar General’s financial results below.

Q2 FY16 financial highlights

During Q2 FY16, Dollar General’s net sales grew 5.8% to $5.39 billion compared to $5.10 billion in the year-ago period. Same-store sales inched up 0.7% due to an increase in average transaction amount, offset by a decline in traffic. The increase in same-store sales were driven by positive growth in the consumables category, flat growth in the seasonal category compared to the year-ago period, offset by a growth decline in the apparel and home categories.

Source: Company's Website
Source: Company’s Website

The net sales increase gained from sales from new stores, offset by sales from closed stores.

During Q2 FY16, gross profit as a percentage of net sales was 31.2%, an increase of 2 basis points from the year-ago period. This increase was driven by higher initial inventory markups and lower transportation costs, partially offset by higher markdowns, a greater proportion of sales of consumables merchandise, and higher inventory shrink.

Dollar General’s selling, general, and administrative expense (SG&A) as a percentage of net sales shrunk to 21.7% in Q2 FY16 compared to 21.8% in the year-ago period, due to lower administrative payroll, advertising, and incentive compensation expenses. These increases were partially offset by higher retail labor and occupancy costs.

During Q2 FY16, Dollar General faced headwinds in the form of retail food deflation and a reduction in both Supplemental Nutrition Assistance Program (SNAP) participation rates and benefit levels, coupled with unseasonably mild spring weather. Despite these headwinds, net income grew to $307 million, or $1.08 per diluted share, in Q2 FY16, compared to net income of $282 million, or $0.95 per diluted share, in the year-ago period.

H1 FY16 financial highlights

For H1 FY16, Dollar General’s net sales rose 6.4% Y-o-Y to $10.7 billion, while same store sales grew 1.4%, driven by higher customer traffic and average transaction amount. Net sales growth was attributable to new stores, modestly offset by closed stores.

Dollar General’s gross profit grew 6.7%, and as a percentage of net sales, increased by 9 basis points to 30.9% in H1 FY16 compared to the year-ago period. The gross profit rate increase was mainly due to higher initial inventory markups and lower transportation costs, partially offset by higher markdowns, a greater proportion of sales of consumables merchandise, and increased inventory shrink.

Dollar General’s SG&A amounted to 21.6% of net sales in H1 FY16 compared to 21.8% in the year-ago period, due to lower administrative payroll, utilities, advertising and incentive compensation expenses. These items were offset by higher retail labor and occupancy costs.

In all, the Company’s net income increased to $602 million, or $2.11 per diluted share, in H1 FY16 compared to net income of $536 million, or $1.79 per diluted share, for the year-ago period.

Both Dollar General and its rival Dollar Tree Inc. (NASDAQ: DLTR) have bucked the trend of disappointing sales and softer demand for non-consumables, by reported sales growth and higher foot traffic on account of expanding their offerings of discretionary products such as seasonal party decorations, home goods, and beauty products.

Other highlights

Inventories: As of July 29th, 2016, total merchandise inventories, at cost, increased 1.6% on a per-store basis to $3.27 billion, compared to $3.03 billion as of July 31st, 2015.

Capital expenditures: During H1 FY16, Dollar General opened 510 new stores and remodeled or relocated 594 stores. Total additions to property and equipment in H1 FY16 were $268 million, including $81 million for distribution and transportation-related capital expenditures; $77 million for improvements, upgrades, remodels and relocations of existing stores; $55 million related to new leased stores, primarily for leasehold improvements, fixtures and equipment; $37 million for stores purchased or built by the Company; and $14 million for information systems upgrades and technology-related projects.

dg3Share repurchases and dividend: During Q2 FY16, Dollar General repurchased 2.5 million shares of its common stock at an average price of $88.55 per share. In H1 FY16, the Company repurchased 5.2 million shares at an average price of $86.61 per share. Since the inception of the share repurchase program in December 2011 through the end of H1 FY16, the Company has repurchased 67.3 million shares worth $4.0 billion, at an average price of $59.93 per share.

On August 24th, 2016, the Board of Directors authorized an additional $1.0 billion for share repurchases, increasing the total authorization for future repurchases to approximately $1.4 billion. The Board also declared a quarterly cash dividend of $0.25 per share on the Company’s common stock.

Store count: Dollar General operated 13,000 stores in 43 states as of August 13th, 2016.

Guidance for full year FY16 and beyond

For H2 FY16, Dollar General will optimize both merchandising and store operations to drive same-store sales while maintaining strict expense control. Dollar General continues to forecast diluted EPS for FY16 within the range of 10% to 15%. Additionally, capital expenditures for FY16 are now expected to be in the range of $580 million to $630 million for the purchase of 42 Wal-Mart Express stores compared to the prior forecast of $550 million to $600 million.

For FY17, the Company intends to accelerate its square footage growth with plans to open about 1,000 stores and remodel or relocate about 900 stores. The discount retailer is focusing on expanding its selection of perishable food, health and beauty care and party and stationery supplies, as it plans to grow from almost 13,000 locations to 20,000 stores by 2020.

Stock Performance

dg4Dollar General’s stock ended the day at $71.75, slipping 0.35%, at the close on Wednesday, September 7th, 2016, having vacillated between an intraday high of $72.33 and a low of $70.87 during the session. The stock’s trading volume was at 7,301,266 for the day. The Company’s market cap was at $20.34 billion as of Wednesday’s close.

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