Profitability in the most recent quarter
As we outlined in the previous part of this series, Dollar Tree (DLTR) and Dollar General (DG) missed same-store sales expectations during the first quarter of 2018 due to cold weather. Not only did they miss top-line expectations, but they also fell short of bottom-line forecasts.
Dollar Tree’s adjusted earnings per share expanded 21.4% YoY or year-over-year to $1.19. The company missed expectations by four cents or 3.3%, which was the biggest margin by which the company missed projections over the last two years.
Dollar General, in comparison, posted a stronger increase of 32% YoY in the bottom-line to $1.36. It was, however, four cents or 2.9% below expectations.
Dollar General’s margins
Dollar General recorded a gross margin of 30.5% of sales in the first quarter, an improvement of 17 basis points over the same quarter last year. This improvement was mainly driven by better inventory shrinking and higher initial markups on inventory purchases.
It was the third consecutive quarter of gross margin improvement for the company. Dollar General’s margins came under pressure during fiscal 2016 and 2017 as the company offered higher mark-downs to more aggressively compete with bigger retailers.
The rising proportion of consumables in Dollar General’s total sales has also affected its profitability over the last several quarters. Consumables typically carry a lower margin.
Dollar Tree’s margins
Dollar Tree’s gross margin has improved for seven consecutive quarters starting in Q2 2016. However, the recent quarter recorded a 20 basis point decline to 30.9% of sales. Both the Dollar Tree and Family Dollar businesses recorded a decrease due to higher shrinking costs, distribution expenses, and merchandise costs.
See the next part of this series for how the companies are placed going forward.