Dollar General saw net sales increase 3.9 percent to $8.5 billion in the third quarter on net income of $487 million and earnings per share (EPS) of $2.08, beating Thomson Reuters analysts’ EPS expectations of $2.01.
Despite both the earnings beat and raising its overall 2021 guidance, the discount retailer’s share price declined more than 4 percent in Thursday morning trading.
In a Nutshell: On the heels of rival Dollar Tree’s decision to raise its $1 price points to $1.25 in the wake of inflation and soaring freight costs, Dollar General is staying firm on its $1 commitment, CEO Todd Vasos said in an earnings call.
“We’re not walking away from a $1 price point,” Vasos said. “We believe that’s so important to her as we continue to move forward. Not just that we believe it—she tells us that each and every day, so I think that value and convenience message will continue to resonate with our core consumer.”
Approximately 20 percent of Dollar General’s overall assortment remains at $1 or less, and Vasos said the company will grow that number where appropriate.
For the 2022 fiscal year, the company plans to execute 2,980 real estate projects, including 1,110 new store openings, 1,750 remodels and 120 store relocations. As part of the expansion, Dollar General will be debuting internationally for the first time, with plans to open up to 10 stores in Mexico by the end of 2022.
Additionally, the discount retailer has major plans for its Popshelf store concept, aiming to triple its store count to roughly 100 next year. By the end of 2025, Dollar General plans to have approximately 1,000 Popshelf locations, which are geared toward higher-income, suburban shoppers seeking out a treasure hunt experience. As of Oct. 29, there are 30 Popshelf stores in the U.S.
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Sales volumes for the Popshelf locations average between $1.7 million and $2 million per store, with the company expecting the average gross margin rate for these stores to exceed 40 percent, according to executive vice president and chief financial officer John Garratt.
The stores are roughly 9,000 square feet and carry more non-consumable categories such as home goods, seasonal decor and party supplies, including items from Dollar General’s private brands.
“Across our Dollar General, Popshelf and DGX format types, we estimate there are approximately 17,000 new store opportunities potentially available in the continental United States alone,” Garratt said in the call.
Total merchandise inventories, at cost, were $5.3 billion compared to $5.0 billion as of Oct. 30, 2020, a 5.4 percent increase. However, when accounting for store openings, inventory dipped 0.1 percent on a per-store basis.
Gross margin was 30.8 percent in the quarter, down 57 basis points from the 31.3 percent margin in last year’s period. This gross profit rate decrease was primarily attributable to the increasing transportation costs, a greater proportion of sales coming from the lower-margin consumables category and an increase in inventory damages. These factors were partially offset by higher markups and a reduction in inventory shrink as a percentage of net sales.
For 2022, Dollar General raised its sales and earnings guidance, with net sales now expected to fall in the range of approximately 1 percent to 1.5 percent; compared to its previous expectation in the range of 0.5 percent to 1.5 percent. Same-store sales declined approximately 3 percent to 2.5 percent, which reflects growth of approximately 13 percent to 14 percent on a two-year stack basis, compared to its previous expectation of a decline of 3.5 percent to 2.5 percent.
The retailer expects diluted EPS in the range of $9.90 to $10.20, which reflects a compound annual growth rate (CAGR) in the range of 22 percent to 24 percent over a two-year period, compared to its previous expectation in the range of $9.60 to $10.20.
Total additions to property and equipment for 2021 were $779 million, including approximately $384 million for improvements, upgrades, remodels and relocations of existing stores; $184 million for store facilities, primarily for leasehold improvements as well as fixtures and equipment in new stores; $178 million for distribution and transportation related projects; and $33 million for information systems upgrades and technology-related projects.
During the third quarter, the discount retailer opened 268 new stores, remodeled 486 stores and relocated 24 stores. For the year, the company has $779 million in capital expenditures including approximately $384 million for improvements, upgrades, remodels and relocations of existing stores; $184 million for store facilities, primarily for leasehold improvements as well as fixtures and equipment in new stores; $178 million for distribution and transportation related projects; and $33 million for information systems upgrades and technology-related projects.
Dollar General continues to expect 2021 capital expenditures, including those related to investments in the business’s strategic initiatives, to remain in the range of $1.1 billion to $1.2 billion. Dollar General’s year-to-date cash flows from operations total $2.2 billion, while total cash and cash equivalents total $488.7 million.
Net Sales: Net sales increased 3.9 percent to $8.5 billion in the third quarter, compared to $8.2 billion in last year’s quarter. The net sales increase was primarily driven by positive sales contributions from new stores, partially offset by a slight decline in same-store sales and the impact of store closures.
Same-store sales decreased 0.6 percent from a year ago, due to a decline in customer traffic, partially offset by an increase in average transaction amount. This included a decline in the apparel and seasonal categories, partially offset by growth in the consumables and home products categories. On a two-year basis, same-store sales jumped 11.6 percent.
Apparel sales played a role in dragging the overall sales total down, dipping 10.9 percent to $348.1 million from $390.5 million in the year-ago period.
Net Earnings: Dollar General reported third-quarter net income of $487 million, a decrease of 15.2 percent compared to $574.3 million in the third quarter of 2020. Quarterly diluted EPS dipped 10 percent to $2.08 from the diluted EPS of $2.31 last year.
Operating profit for the third quarter of 2021 decreased 13.9 percent to $665.6 million compared to $773.1 million taken in during the year-ago period.
CEO’s Take: When discussing the potential changes in store traffic due to the Omicron variant of Covid-19 in the earnings call Q&A, Vasos said that overall footfall continues to be “a little bit soft,” even though the company saw sequential improvement in the third quarter.
“We’re definitely not happy with traffic overall, because we love to see positive, but we understand the drivers and the reasons,” Vasos said. “We’ll make sure that as things continue to progress, that we’re squarely focused on driving traffic, and price and convenience is our big mantra. We’ll continue to make sure that both of those are well intact for our core consumer.”