The latest results from Dollar General Corp. (NYSE:DG) were met with a sharp mark-down as they disappointed in terms of both the sales and margin outlook.
In general the dollar stores are attractive for their defensive properties, but many of the headwinds that began in mid 2012 are still around and they are finding growth a lot harder to come by. In summary Dollar General’s results raised more questions than answers and the current valuation still makes it a difficult stock to get too excited about.
Dollar General disappoints
After a disappointing quarter Dollar General declared that its expected sales growth rate and gross margin performance for the full year would be less than it had -only recently- predicted.
There were a few reasons cited and I have pulled out the salient points below
- Payroll taxes, tough weather comps and sales headwinds from tax refund delays hurt the current quarter’s results
- The sales mix contained a larger amount of consumables which tend to be lower margin. Furthermore even within consumables there is a shift to lower margin consumables
- Inventory shrink was larger than expected
- Increasing tobacco sales are naturally reducing margins
The issues hurting consumer’s income were somewhat expected (and Dollar General had previously argued that this would be a weak quarter anyway) but the sales mix concerns were somewhat more surprising. For example, Dollar Tree, Inc. (NASDAQ:DLTR) had recently given results and notably pointed out that its discretionary sales were growing faster than consumables. This suggests that Dollar General’s issues might not be solely down to tighter customer wallets in the quarter.
Moreover if we look at how Family Dollar Stores, Inc. (NYSE:FDO) has performed in recent times, we can see that comparable sales growth has been achieved in a climate of falling gross margins. In short, Family Dollar tried to expand its non-consumables sales (mainly home based and apparel) and ran into difficulties as it found it hard to sell higher margin products to its customers.
In summary, Dollar Tree did fine with expanding discretionary sales and therefore gross margins, but Family Dollar has had problems doing this (particularly last year) and now Dollar General is lowering estimates thanks to lower-than-expected discretionary sales.
My feeling is that Dollar General’s difficulties are more a consequence of the difficulty in increasing higher margin sales. It seems that hard pressed consumers feel more inclined to shop for consumables in its stores. As to the weather effects, if they had significant effect on discretionary sales then why wouldn’t the management raise guidance now that spring weather has arrived?