What’s Happening to Dollar General’s Margins?
DG’s 2Q17 earnings performance
Dollar General’s (DG) reported a 1.9% YoY (year-over-year) increase in EPS (earnings per share) in its fiscal 2Q17 results on August 31. Its adjusted diluted EPS stood at $1.01, or $0.01 higher than the average Wall Street earnings forecast.
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DG’s declining gross margin
DG’s gross margin, however, fell for the fourth-straight quarter, dropping 50 basis points to 30.7% of sales in fiscal 2Q17, as the company offered higher markdowns to compete more aggressively in the intensely competitive retail industry. The gross margin was also negatively impacted by the higher proportion of consumables in total sales, which typically carry a lower margin.
Competitor Dollar Tree (DLTR), which reported its fiscal 2Q17 results on August 24, posted a 50-basis-point rise in gross margin to 30.8% of sales. Lower merchandise, occupancy, and freight costs, along with a decline in inventory, drove improvement in DLTR’s gross margin.
DG’s operating margin
Dollar General’s operating margin fell ~95 basis points to 8.5% of sales, driven by a lower gross margin and a 43-basis-point rise in SG&A (selling, general, and administrative) expenses. The SG&A rate increased to 22.1% of sales, mainly due to higher salaries and occupancy costs.
The fall in its margins drove Dollar General’s stock price down, despite its top- and bottom-line beats.
Investors looking for exposure to Dollar General can consider the SPDR S&P Retail ETF (XRT), which invests 1.4% of its total holdings in DG.