Undeterred by bad weather and competitive pressures that took a toll on its first quarter performance, Dollar General is pressing ahead with plans for 700 new stores, recently opened its 12th distribution center and believes its full year profit forecast is attainable.
The company said sales during its 13 week quarter ended May 2 increased 6.8% to $4.52 billion, while same store sales increased 1.5%. Although the comp figure was below the company’s expectations for an increase in the range of 2% to 3%, customer traffic and average transaction size still grew, according to the company. Driving the gain were consumable category sales which were said to have significantly outpaced non-consumable categories. Tobacco products, perishables and candy and snacks were top performers, according to the company.
“Dollar General’s first quarter same-store sales improvement of 1.5% was driven by growth in our consumables business and, overall, reflected the challenges of unfavorable winter weather, heightened competition and the current economic environment,” said Rick Dreiling, Dollar General’s chairman and CEO. “Even as these factors weighed on our sales results, we saw trends improve as we moved through the quarter and we delivered (earnings per share) 72 cents, which was in line with our guidance.”
The company aided its EPS cause through aggressive share repurchase activity which made it possible to hit the low end of its targeted profit range of 72 cents to 74 cents. Analysts had expected the company to report earnings per share of 73 cents. Dollar General said it spent $800 million during the first quarter to repurchase 14.1 million shares, an amount that is roughly one third of the total 44.5 million shares repurchased for $2.3 billion since the program was authorized in December 2011. The big reduction in shares helped boost earnings per share by two cents. First quarter net income of $222 was essentially flat with the prior year profit of $220 million.
While Dollar General was able to hit its profit target, the lack of top line growth caused gross margin and expense leverage challenges. Gross margins declined 57 basis points to 30% of sales which the company said was attributable to lower margin consumables comprising a larger portion sales and higher markdowns related to promotional activity. Meanwhile, expenses increased to 21.6% of sales from 21.3% of sales as moderate comp store growth caused the company to lose leverage while it also faced increased rent and utility costs.
Despite these challenges, Dollar General maintained it breakneck pace of growth during the quarter, opening 214 stores and a 930,000-sq.-ft. distribution center in Bethel, Pa. The company also confirmed its full year profit forecast and plans to open 700 new stores and remodel 500 others. The company ended the first quarter with 11,338 stores throughout the U.S.
“We continue to grow both our customer traffic and average transaction amount as our merchandising initiatives reinforce our affordability and value messaging,” Dreiling said. “Sales trends began to improve in April and have continued to gain momentum. We are pleased to see that our merchandising strategies are gaining traction with a strengthening of sales in both consumables and non-consumables in our second quarter to date.”
Dollar General, like many other retailers, is beginning 2014 in somewhat of a hole after reporting weaker than expected sales and profits aided by share-repurchase activity. Going forward, the company is going to need a heightened level of spending among its cash-strapped core customers to achieve a full year profit target which was left intact.
Total sales this year are expected to rise between 8% and 9% with same store sales expected to grow between 3% and 4%, according to the company. Full year profits are expected to range from $3.45 to $3.55 which is the same forecast the company shared when it reported fourth quarter results earlier this year.