uploads/2018/03/3d.jpg

Dollar General’s Gross Margin Strengthens in 4Q17

By

Updated

Dollar General’s 4Q17 earnings performance

While Dollar General (DG) missed Wall Street’s top-line expectations in 4Q17, the company managed to post in-line earnings per share (or EPS). Its adjusted diluted EPS declined 0.7% YoY (year-over-year) to $1.48, driven by higher SG&A (selling, general, and administrative) expenses during the quarter.

The company, however, reported a 43 basis point improvement in its gross margin to 32.1% of sales. Most of this improvement was due to a reduction in markdowns, higher inventory markups, and a lower inventory shrink. This was the second consecutive quarterly increase in the company’s gross margin. Dollar General has been under margin pressure over the last year and a half in the face of rising competition and a change in sales mix toward consumables, which typically carry a lower gross profit rate.

Competitor Dollar Tree (DLTR) posted its seventh consecutive quarter of gross margin improvement in Q4 when it reported results on March 7. Its gross margin was up 90 basis points to 33% of sales.

Article continues below advertisement

What drove DG’s SG&A expenses higher?

Dollar General’s SG&A expenses increased ~160 basis points to 21.9% of sales in Q4, primarily driven by higher labor and occupancy costs. Also adding to the SG&A expenses were the 35 store closures during the quarter that resulted in ~$28 million of related pre-tax costs.

The company recorded a benefit of $311 million, or $1.15 per diluted share, related to the US Tax Cuts and Jobs Act. Including this benefit, the company’s net income improved 76.5% to $712 million, or $2.63 per share.

Investors looking for exposure to Dollar General through ETFs can consider the SPDR S&P Retail ETF (XRT), which invests 1% of its total holdings in the company

See the next parts of this series for Dollar General’s fiscal 2017 performance.

Advertisement

More From Market Realist