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Dollar General Beats on Revenues and Earnings in Fiscal 4Q16

PART:
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Part 3
Dollar General Beats on Revenues and Earnings in Fiscal 4Q16 PART 3 OF 4

Why Dollar General’s Margins Deteriorated in Fiscal 4Q16

Evaluating Dollar General’s fiscal 4Q16 earnings performance

As we’ve discussed in this series, Dollar General (DG) delivered a top and bottom line beat when it delivered its fiscal 4Q16 results on March 16, 2017. The retailer bounced back with solid 14.6% YoY growth in its earnings per share (or EPS). Its EPS stood at $1.49, $0.08 better than the consensus estimates.

In comparison, Dollar Tree (DLTR) reported a 35% YoY increase in earnings per share, while Walmart (WMT) and Target (TGT) reported respective falls of 12.8% YoY and 4.6% YoY in 4Q16.

Why Dollar General’s Margins Deteriorated in Fiscal 4Q16

Why Dollar General’s Margins Deteriorated in Fiscal 4Q16

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During the company’s fiscal 4Q16 results, Todd Vasos, Dollar General’s CEO, noted, “We are pleased with our fourth quarter 2016 financial results, and believe that during the quarter many of our initiatives continued to gain traction.

“For the year, we effectively managed through what proved to be a challenging retail environment to deliver same-store sales growth of 0.9% and diluted earnings per share growth of 12%, while returning nearly $1.3 billion to shareholders through the combination of share repurchases and dividends.”

A look at margins

Although Dollar General’s (DG) top line improved in fiscal 4Q16, its margins deteriorated. Its gross margin fell 19 basis points to 31.6%, driven by higher markdowns. The increase in markdowns was mostly due to a rise in promotional activities and inventory clearance, along with a larger proportion of lower-margin consumables in total sales.

DG’s operating margin fell 27 basis points to 11.1% as the SG&A (selling, general, and administrative) expenses rose 6 basis points due to higher labor costs.

Fiscal 2017 outlook

Dollar General’s (DG) EPS rose 12% YoY to $4.43 for fiscal 2016. For fiscal 2017, the company forecast an EPS range of $4.25–$4.50 based on a 4%–6% increase in sales.

Investors looking for exposure to Dollar General through ETFs can consider the SPDR S&P Retail ETF (XRT), which invests 1.2% of its holdings in the company.

In the final part of this series, we’ll look at Dollar General’s shareholder returns.

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