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Dollar General beats Street, but profit slides; ups forecast

BY Marianne Wilson

Dollar General turned in mixed results for its second quarter, with gains in sales but a dip in profits and a decline in gross margins.

Net sales rose 8.1% to $5.83 billion in the quarter ended Aug. 4, compared to $5.39 billion in the year-ago quarter, better than analysts were expecting. Same-store sales increased 2.6%, also better than expected, driven by increases in average transaction amounts and customer traffic.

Net income fell 3.8% to $295 million, or $1.08 per diluted share, compared to net income of $307 million, or $1.08 per diluted share, in the year-ago period. Included in diluted earnings per share for the 2017 second quarter was an approximate $0.02 charge primarily for the lease termination costs related to the stores it acquired. (Dollar General acquired 323 stores in the spring that were sprung off in 2015’s Dollar Tree-Family Dollar merger.)

Excluding items, Dollar General earned $1.10 per share, beating analysts' average estimate of $1.09.

Neil Saunders, managing director of GlobalData Retail, commented that Dollar General's bottom line pain is being caused by a range of issues, "none of which are easily solved."

"Foremost among these are various cost increases in wages, including at management level," Saunders said. "A rise in occupancy costs – which at mature stores are running well ahead of sales increases – was also unhelpful. A small acquisition created some lease termination charges, though unlike the other expense hikes, this is an exceptional entry."

Dollar General reported a 47-basis-point decline in gross margin to 30.7% from the prior-year quarter.

"This is a function of both higher promotional activity in a competitive marketplace and a shift in the sales mix towards lower margin consumables," Saunders said.

“I am pleased with our results at this point in the year," said Todd Vasos, Dollar General’s CEO. "For the quarter, same-store sales grew 2.6%, driven by an increase in our average transaction amount and, importantly, positive customer traffic. In a dynamic retail and consumer landscape, we continue to make targeted investments in our business to execute on our focused strategic and operating initiatives which we believe will contribute to sustainable improvement over time."

For fiscal 2017, the retailer plans to open approximately 1,285 new stores, which includes the originally forecasted approximate 1,000 locations plus the net acquired stores. It also is remodeling or relocating 760 stores.

Dollar General lifted the lower end of its profit forecast range for the year ending January. It now expects earnings of $4.35 to $4.50 per share, compared with a previous forecast of $4.25 to $4.50.

The company said its financial outlook does not reflect any potential impact from disaster-related expenses related to Hurricane Harvey, given the assessment of damage is still in process.

Dollar General operated 14,000 stores in 44 states as of August 19, 2017.

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