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Why Dollar General’s Margins Might Be under Pressure in 2019

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Mar. 18 2019, Published 10:58 a.m. ET

Why gross margin fell in 2018

Dollar General’s (DG) gross margin declined in the fourth quarter and full-year fiscal 2018, which ended on February 1, 2019. Dollar General’s gross margin contracted 91 basis points on a year-over-year basis to 31.2% in the fourth quarter mainly due to higher markdowns. Other factors that adversely impacted the company’s fourth-quarter gross margin included lower initial markups on inventory purchases, a rise in LIFO (last-in-first-out) provision, and an increase in the sales of consumables (which generally carry a lower margin than other categories). A lower inventory shrink had a favorable impact on Dollar General’s fourth-quarter gross margin.

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Dollar General’s (DG) gross margin contracted by 30 basis points to 30.5% in fiscal 2018 due to higher markdowns and a rise in sales in the lower-margin consumables category, higher transportation costs, a higher LIFO provision, partially offset by an improvement in shrink rate and higher initial markups on inventory purchases.

Dollar General’s operating margin declined to 9.6% in the fourth quarter of 2018 from 10.2% in the fiscal 2017 fourth quarter. Despite a decrease in the SG&A (selling, general and administrative) expense rate as a percentage of sales, Dollar General’s operating margin contracted due to lower gross margin. The SG&A rate benefitted from lower repairs and maintenance expenses, lower benefits costs and incentive compensation, and a reduction in utilities as a percentage of net sales. However, the SG&A rate was adversely impacted by hurricanes and other disaster-related expenses.

Dollar General’s operating margin declined to about 8.3% in fiscal 2018 from about 8.6% in fiscal 2017 due to lower gross margin. The SG&A expense rate was almost flat at 22.2% in fiscal 2018 as lower repair and maintenance expenses were partially offset by a rise in occupancy costs and depreciation expenses.

Margins might continue to be under pressure

Dollar General’s fiscal 2019 gross margin might continue to be under pressure due to the continued rise in transportation costs. The company’s operating margin might also decline due to the investments in the company’s new transformation strategic plans DG Fresh and DG Fast Track. Dollar General expects to spend $50 million on its strategic initiatives in fiscal 2019. The company believes that its transformational plans could improve its margins over time.

We’ll discuss the company’s strategic initiatives in the next part.

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