Margins in the first quarter
Dollar General (DG) generated better gross as well as operating margins than rival Dollar Tree (DLTR) in the first quarter of fiscal 2019. However, both Dollar General and Dollar Tree reported a decline in their margins in the first quarter on a year-over-year basis. Dollar General’s gross margin declined 23 basis points to 30.2% in the first quarter of fiscal 2019 due to a rise in distribution and transportation costs, and a higher sales proportion of lower-margin consumables, partially offset by increased initial markups on inventory purchases.
Dollar Tree’s first-quarter gross margin declined about 90 basis points to 29.7%. The company’s Dollar Tree segment’s gross margin was flat on a YoY basis at 34.5%, but Family Dollar segment’s gross margin declined to 24.8% in fiscal 2019’s first quarter compared to 26.7% in fiscal 2018’s first quarter. Family Dollar’s gross margin was adversely impacted by higher merchandise costs (due to increased freight costs and higher sales of lower-margin consumables), higher shrink costs, and higher distribution as well as occupancy costs.
What dragged down operating margin
Dollar General’s operating margin declined about 30 basis points to 7.7% in the first quarter due to lower gross margin and higher employee benefits and occupancy costs as a percentage of sales.
Dollar Tree’s operating margin declined to 6.6% in fiscal 2019’s first quarter compared to 7.9% in fiscal 2018’s first quarter. The Dollar Tree segment’s operating margin contracted 20 basis points to 13.2% while the Family Dollar segment’s operating margin contracted about 200 basis points to 3.2%.
Dollar Tree’s operating margin was negatively impacted by higher operating and corporate expenses and a rise in payroll expenses, partially offset by lower depreciation and amortization.
Dollar General expects to deliver improvement in its fiscal 2019 gross margin despite higher fuel and transportation costs and headwinds from tariffs. Dollar General’s operating margin is expected to be under pressure in fiscal 2019 due to investments in the company’s strategic initiatives.
Dollar Tree’s fiscal 2019 margins are expected to be weighed down by higher store payroll costs, a continued rise in domestic freight costs in the first half of fiscal 2019, and growth investments.