Dollar General’s Same-store Sales Go South on Lower Traffic

Retailer’s same-store sales go into negative territory for first time in 36 quarters

dg1Discount retailer Dollar General Corporation (NYSE: DG) announced its Q3 FY16 financial results on December 01st, 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, and greeting cards. Its merchandise includes national brands from manufacturers, as well as private brand selections.

The Company operates approximately 12,575 stores in over 43 states. 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.

Q3 FY16 financial highlights

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Source: Company’s Data

During Q3 FY16, Dollar General’s net sales grew 5% to $5.32 billion compared to $5.07 billion in the year-ago period, driven by sales from new stores, but modestly offset by sales from closed stores. More worrisome is the fact that for the first time in 36 quarters, same-store sales went into negative territory by slipping 0.1% versus the year-ago period, due to a decline in traffic, partially offset by higher average transaction amount. Same-store sales were driven by positive results in the consumables category offset by negative results in the seasonal, apparel and home products categories.

During the reporting quarter, gross profit as a percentage of net sales decreased 49 basis points to 29.8% from the year ago same quarter. The gross profit rate decrease was mainly due to higher markdowns, but was driven by inventory clearance and promotional activities, a greater proportion of sales of consumables, and increased inventory shrink, partially offset by higher initial inventory markups.

dg3Dollar General’s selling, general, and administrative expense (SG&A) as a percentage of net sales rose to 22.5% compared to 22% in the year-ago period, mainly due to higher retail labor and occupancy costs. SG&A during the reporting quarter also included charges of $13.0 million, or 25 basis points, associated with the acquisition of the former Walmart Express store locations and related closure of existing stores, $11.0 million of which was for lease termination and other exit and disposal costs.

In addition, the Company experienced an increase in disaster-related expenses of $7.7 million, or 14 basis points, most of which were hurricane related. Partially offsetting these items were reductions in administrative payroll costs, incentive compensation expenses and advertising expenses.

dg4During Q3 FY16, Dollar General faced headwinds in the form of retail food deflation, a reduction in both Supplemental Nutrition Assistance Program (SNAP) participation rates and benefit levels as well as warmer-than-usual weather curbing demand for seasonal items. As a result of these headwinds and higher expenses, Q3 FY16 net income declined to $235 million, or $0.84 per diluted share, compared to net income of $253 million, or $0.86 per diluted share, in the year-ago quarter.

Both Dollar General and its rival Dollar Tree Inc. (NASDAQ: DLTR) and Wal-Mart Stores Inc. (NYSE: WMT) have reported disappointing sales mainly because of declining food prices, lower store traffic and lower average ticket. Despite investments in technology and manpower, migration to online sales and intense competition from Amazon.com Inc. (NASDAQ: AMZN) have also hurt sales during the reporting quarter.

Other highlights

Inventories: As of October 28th, 2016, total merchandise inventories, at cost, increased 5.6% on a per-store basis to $3.49 billion compared to $3.10 billion as of October 30th, 2015. The increase was concentrated in everyday planogram categories as compared to seasonally-related categories. Key factors impacting the increase in per store inventory were the Company’s on-shelf availability initiative and the timing of receipts, coupled with sales performance.

Capital expenditures: As of October 28th, 2016, total additions to property and equipment amounted to $406 million, including $136 million for distribution and transportation-related capital expenditures; $116 million for improvements, upgrades, remodels and relocations of existing stores; $92 million related to new leased stores, primarily for leasehold improvements, fixtures and equipment; $38 million for stores purchased or built by the Company and $18 million for information systems upgrades and technology-related projects.

dg5Share repurchases and dividend: During Q3 FY16, the Company repurchased 2.9 million shares of its common stock under its share repurchase program at an average price of $77.18 per share. As of October 28th, 2016, the Company repurchased 8.2 million shares of its common stock under the share repurchase program at an average price of $83.24 per share. Since the inception of the share repurchase program in December 2011 through the end of Q3 FY16, the Company has repurchased 70.2 million shares totaling $4.3 billion, at an average price of $60.65 per share. The total remaining authorization for future repurchases was approximately $1.2 billion at the end of Q3 FY16. The authorization has no expiration date.

On November 30th, 2016, the Board of Directors declared its regular quarterly cash dividend of $0.25 per share on the Company’s common stock. The fourth quarter dividend will be payable on January 4th, 2017, to shareholders of record at the close of business on December 21st, 2016.

Purchase of 41 Walmart Express stores: On July 27th, 2016, Dollar General announced that it has completed the purchase of 41 former Walmart Express locations across 11 states. Dollar General anticipates relocating 40 existing Dollar General stores into the purchased sites and entering one new market as part of the purchase. Communities served by the newly-relocated stores will enjoy a fresh DG16 layout with additional sales floor square feet, complete with expanded offerings such as fresh meat and produce, all designed to make shopping easier for customers. Dollar General also intends to operate the fueling stations in 37 of these locations.

Store count: Dollar General operated 13,205 stores in 43 states as of October 28th, 2016. Total store square footage was 98.09 million, representing a growth of 6.8% versus the prior year period. As of October 28th, 2016, the Company opened 768 new stores and remodeled or relocated 861 stores.

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 forecasts that diluted EPS for FY16 to be at the lower end of the Company’s long-term growth model range of 10% to 15%. The Company expects the 53rd week to contribute approximately 200 basis points to its net sales performance and continues to estimate a $0.09 per diluted share impact to EPS.

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

dg6Dollar General’s stock ended the day at $74.56, gaining 1.47%, at the close on Friday, December 2nd, 2016, having vacillated between an intraday high of $74.79 and a low of $72.93 during the session. The stock’s trading volume was at 5,708,355 for the day. The Company’s market cap was at $20.70 billion as of Friday’s close.

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