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Why Dollar General’s Earnings Growth Could Slow in 3Q16

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Evaluating Dollar General’s earnings per share

In the second quarter of 2016, Dollar General (DG) reported a 13.7% YoY (year-over-year) increase in earnings per share (or EPS) to $1.08. This total was a cent lower than the Wall Street average earnings estimate.

For the third quarter, Wall Street has predicted a 5.4% YoY rise in EPS to $0.93. This total would mark the slowest growth quarter for Dollar General’s earnings in the last ten quarters.

For fiscal 2016 overall, earnings are likely to grow 13.4% to $4.5 per share. Dollar General’s management forecasted a 10% to 15% range for EPS growth in fiscal 2016.

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How did Dollar General’s competitors fare?

Target (TGT) reported its quarterly results on November 16. The mass merchandiser recorded a 22% YoY increase in EPS.

Walmart (WMT), which reported its results a day after Target, recorded a 1% decline in its earnings.

Dollar Tree (DLTR) reported a 65% YoY increase in EPS when it reported its results on November 22. All three companies beat the Wall Street average earnings estimates for the quarter.

DG’s gross margin improved marginally in 2Q16

DG’s gross margin improved two basis points to 31.2% of sales in 2Q16. This improvement mainly resulted from a fall in transportation costs and an increase in inventory markups. However, a higher proportion of consumable merchandise sales with lower margins, higher markdowns, and greater inventory decreases washed away part of the gains.

2Q16 operating margin improves on lower SG&A

Operating margin improved by one basis point to 9.4%, driven by a higher gross margin and lower SG&A (selling, general, and administrative) rate. SG&A expenses improved to 21.7% of sales in 2Q16 compared to 21.8% in 2Q15. This improvement resulted from a decline in costs relating to administrative payroll, advertisements, and bonuses.

For the third quarter, Wall Street predicts a 2.9% YoY increase in operating profit to $442.7 million. Operating margin is likely to land at 8.2% of sales.

Investors looking for exposure to Dollar General through ETFs can consider the Van Eck Retail RTF (RTH), which invests 2.9% of its total holdings in the company.

Read the next parts of this series to learn about Wall Street’s view on Dollar General and its discount store peers.

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