Dollar General’s 2016 Margins: The Impact of Rising Competition
A look at Dollar General’s 2016 profitability
As we discussed, Dollar General’s (DG) top line was dampened in fiscal 2016 by deflationary headwinds and the lowering of SNAP benefits. While the company missed consensus top line estimates in the first three quarters, it also fumbled on the bottom line in the second and the third quarters.
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Margins plunge in 2016: Here’s why
The gross margin declined by 11 basis points to 30.8% in 2016 as markdowns shot up, especially in the second half of the year. The rise in markdowns was driven by an increase in promotional activities and inventory clearance
Retail giant Walmart (WMT) reportedly made some aggressive price cuts near stores located close to Dollar General stores. This moved forced the discount retailer to make price investments, sacrificing its margins.
“There is evidence Walmart has lowered food prices in certain categories, which likely pressured Dollar General’s profitability,” said Barclay’s analyst Karen Short. She added, “We believe Dollar General’s initial price reductions were likely introduced more broadly in the third quarter, potentially pressuring results in the near-term.”
Despite a fall in margins, DG displays industry-leading profitability
Operating margin was down ten basis points to 9.4%, negatively affected by a lower gross margin and a three basis point rise in SG&A (selling, general and administrative) expenses to 21.4% of sales during the year.
However, the company was able to maintain one of the best margins among the dollar store, grocery, and mass merchandising peer group. In comparison, Dollar Tree (DLTR), Kroger (KR), Walmart (WMT), and Costco (COST) reported operating margins of 8.2%, 3%, 4.7%, and 3.1%, respectively, in their last fiscal years.
Investors looking for exposure to Dollar General through ETFs can consider the Van Eck Retail RTF (RTH), which invests 2.7% of its total holdings in the company.