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Why Is Dollar General (DG) Down 9.4% Since the Last Earnings Report?

It has been about a month since the last earnings report for Dollar General Corporation DG. Shares have lost about 9.4% in that time frame, underperforming the market.

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

Dollar General Beats Q1 Earnings & Sales Estimates

Dollar General reported better-than-expected results for the second straight quarter, as the company posted first-quarter fiscal 2017 financial numbers. The company posted adjusted earnings of $1.03 per share surpassing the Zacks Consensus Estimate of $0.99 but was flat year over year.

Net sales came in at $5,609.6 million, an increase of 6.5% from the prior-year quarter. Moreover, net sales came ahead the Zacks Consensus Estimate of $5,598 million, marking the second consecutive quarter of beat.

The company’s robust results were driven by robust performance of consumables, seasonal, home products and apparel.

The company’s comparable-store sales inched up 0.7% year over year primarily owing to rise in average transaction amount. However, the gain was marginally overshadowed by fall in traffic. Consumables and apparel categories provided a boost to the comparable-store sales while the seasonal and home categories had a negative impact.

Sales in the Consumables category increased 6.8% to $4,315.5 million, while the Seasonal category witnessed a rise of 6.2% in sales to $662.6 million. Home products sales increased 3.2% to $333.2 million and Apparel category sales grew 6.7% to $298.3 million.

Gross profit increased 5.4% to $1,699 million, while gross margin contracted 34 basis points (bps) to 30.3% due to increased markdowns, on account of inventory clearance and promotional activities along with a higher percentage of sales of consumables which generally have lesser gross profit in comparison to non-consumables.

Operating profit declined 1.4% to $473.8 million, while operating margin decreased 68 bps to 8.5%.

Other Financial Details

Dollar General ended the quarter with cash and cash equivalents of $206 million, long-term obligations of $2,632 million and shareholders’ equity of $5,528.9 million. During the quarter, the company incurred capital expenditures of $144 million. Capital expenditure for fiscal 2017 is now anticipated to be in the range of $715–$765 million, up from the previous guidance of $650–$700 million.

The company bought back 1.3 million shares in the first quarter. Since the commencement of the share repurchase program in Dec 2011, the company has bought back 75.6 million shares aggregating $4.7 billion. At the end of the first quarter, the company has an outstanding authorization of nearly $845 million. Further, management announced a quarterly dividend of $0.26 per share that will be payable on Jul 25, 2017 to shareholders of record as on Jul 11. Further in fiscal 2017, the company continues to expect share repurchase of nearly $450 million.

Store Acquisition

The company revealed that the Federal Trade Commission approved its plan to buy 322 stores across 36 states, from a small multi-price point retailer. While the deal is expected to conclude in Jun 2017, the new store sites are expected to be converted into Dollar General’s banner by Nov 2017 end. This transaction is likely to impact fiscal 2017 results.

Outlook

Including the impact from the aforementioned buyout, management now anticipates net sales to rise in the band of 5–7%, compared with the previous forecast of 4–6% increase. Same-store sales growth is still anticipated in the band of slightly positive to 2% for fiscal 2017. Further, GAAP earnings outlook was reiterated in the band of $4.25 to $4.50 per share.

Moreover, the company expects to buyback nearly $450 million in fiscal 2017, and intends to introduce roughly 1,290 new outlets, relocate or remodel 760 stores and shutter down 140 stores. As of May 5, 2017, Dollar General operated 13,320 stores across 43 states.

How Have Estimates Been Moving Since Then?

Following the release, investors have witnessed a downward trend in fresh estimates. There have been two revisions higher for the current quarter compared to four lower.

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 a 'D'. The stock was allocated a grade of 'A' on the value side, putting it in the top 20% for this investment strategy.

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

Based on our scores, the stock is more suitable for value than growth investors.

Outlook

Estimates have been broadly trending downward for the stock. The magnitude of this revision also indicates a downward shift. Notably, the stock has a Zacks Rank #2 (Buy). We are expecting an above average return from the stock in the next few months.


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