Dollar General (DG) Up 10.3% Since Earnings Report: Can It Continue?

More than a month has gone by since the last earnings report for Dollar General Corporation DG. Shares have added about 10.3% in that time frame, outperforming the market.

Will the recent positive trend continue leading up to the stock's next earnings release, or is it due for a pullback? Before we dive into how investors and analysts have reacted of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Dollar General Q2 Earnings & Sales Top Estimates

Dollar General delivered positive earnings surprise for the third consecutive quarter, when the company posted second-quarter fiscal 2017 results. The company reported earnings of $1.08 per share. However, on an adjusted basis earnings per share came in at $1.10, beating the Zacks Consensus Estimate by a penny and also increased 2% year over year.

Net sales came in at $5,828.3 million, an increase of 8.1% from the prior-year quarter. Moreover, net sales came ahead the Zacks Consensus Estimate of $5,816 million, marking the third consecutive quarter of beat. Increase in sales was driven by robust performance of consumables and seasonal categories.

The company’s comparable-store sales increased 2.6% year over year primarily owing to rise in average transaction amount as well traffic. Consumables and seasonal categories provided a boost to the comparable-store sales while the home products and apparel categories had a negative impact.

Sales in the Consumables category increased 8.9% to $4,484.4 million, while the Seasonal category witnessed a rise of 6.5% in sales to $718 million. Home products sales increased 3.8% to $327.6 million and Apparel category sales grew 4.3% to $298.3 million.

Gross profit advanced 6.5% to $1,790.5 million, while gross margin contracted 47 basis points (bps) to 30.7% owing to increased markdowns and promotional activities along with a higher percentage of sales of consumables which generally have lesser gross profit in comparison with non-consumables.

Operating profit declined 3.1% to $493.1 million, while operating margin decreased more than 90 bps to 8.5%.

Other Financial Details

Dollar General ended the quarter with cash and cash equivalents of $214.2 million, long-term obligations of $2,683.1 million and shareholders’ equity of $5,687.1 million. In the first six months of fiscal 2017, the company incurred capital expenditures of $314 million. The company continues to anticipate capital expenditure for fiscal 2017 to be in the range of $715-$765 million.

The company bought back one million shares in the second quarter. Since the commencement of the share repurchase program in December 2011, the company has bought back 76.7 million shares aggregating $4.7 billion. At the end of the second quarter, the company has an outstanding authorization of nearly $770 million. Further, management announced a quarterly dividend of 26 cents per share that will be payable on Oct 24, 2017 to shareholders of record as on Oct 10. Further in fiscal 2017, the company continues to expect share repurchase of nearly $450 million.

Store Acquisition

The company stated that in Jun 12, 2017, it completed the buyout of 285 Acquired Stores. The new store sites are expected to be converted in to Dollar General’s banner by November 2017 end.

Outlook

Including the impact from the aforementioned buyout, management now anticipates net sales to rise in the band of 5-7%. However, the company expects GAAP earnings in the band of $4.35-$4.50 per share, up from the previous guided range of $4.25-$4.50.  Same-store sales growth is still anticipated in the band of marginally positive to 2% for fiscal 2017.

Moreover, the company intends to introduce roughly 1,285 new outlets, relocate or remodel 760 stores. As of Aug 4, 2017, Dollar General operated 13,865 stores across 43 states.

How Have Estimates Been Moving Since Then?

Following the release, investors have witnessed an upward trend in fresh estimates. There has been one revision higher for the current quarter. While looking back an additional 30 days, we can see even more upward momentum. There have been three moves up in the last two months.

Dollar General Corporation Price and Consensus

 

Dollar General Corporation Price and Consensus | Dollar General Corporation Quote

VGM Scores

At this time, Dollar General's stock has a nice Growth Score of B, though it is lagging a lot on the momentum front with an F. The stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Zacks' style scores indicate that the company's stock is suitable for value and growth investors.

Outlook

While estimates have been moving upward, the magnitude of the revision is net zero. Notably, the stock has a Zacks Rank #3 (Hold). We expect in-line returns from the stock in the next few months.

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