Dollar General's stock turns lower as inflation is still a problem for customers

By Tomi Kilgore

Same-store sales show a surprise quarterly gain, but profit outlook for the current quarter disappoints

Shares of Dollar General Corp. initially rallied, then turned lower Thursday, after the discount retailer reported a surprise increase in same-store sales for the latest quarter but provided a downbeat profit outlook for the current quarter.

"Customers are continuing to feel the impact of the last two years of inflation, which we believe is driving them to make tradeoffs in the store," CEO Vasos said, according to a FactSet transcript of the post-earnings call with analysts.

And Chief Financial Officer Kelly Dilts said on the call that after years of fewer markdowns, the promotional environment in 2024 will revert to pre-pandemic levels, leading to increased promotional discounting.

The stock (DG) jumped as much as 6.9% moments after the opening bell, before pulling a sharp U-turn to drop 3.5% in morning trading. The intraday high of $168.07 was the highest price seen since Aug. 10, 2023.

The stock's turnaround comes after government data showed that inflation continued to linger at levels that concerned the Federal Reserve. It also comes a day after rival Dollar Tree Inc.'s stock (DLTR) tumbled in the wake of a quarterly profit miss, a downbeat outlook and plans to close 600 Family Dollar stores this year.

For the quarter to Feb. 2, Dollar General said net income fell to $401.8 million, or $1.83 a share, from $659.1 million, or $2.96 a share, in the same period a year ago. But that beat the FactSet consensus for earnings per share of $1.73.

Net sales were down 3.4% to $9.86 billion, due in part to the latest quarter containing one less week than last year, but were above the FactSet consensus of $9.77 billion.

Meanwhile, same-store sales, or sales of stores open at least a year, increased 0.7%, as a nearly 4% increase in customer traffic offset a decrease in the average transaction. Analysts had been calling for a 1% decline.

The same-store sales growth came from strength in the consumables category, which includes food, cleaning products and health and beauty products, partially offset by weakness in home products, apparel and seasonal categories.

Gross margin declined about 1.4 percentage points to 29.5%, due to increased shrink and inventory markdowns. Selling more consumables, which generally have lower margins, also weighed.

The company said it ended the year with $7 billion worth of merchandise inventory, up 3.5% from last year but down 1.1% on a per-store basis.

Looking ahead, the company expects first-quarter EPS of $1.50 to $1.60, below the current FactSet consensus of $1.88, but same-store sales for the quarter are expected to grow 1.5% to 2%, which beat expectations of a 0.3% rise.

For fiscal 2024, the company expects EPS of $6.80 to $7.55, which surrounds the FactSet consensus of $7.42, and projects same-store sales to rise 2% to 2.7% versus expectations of 1.1% growth.

"[I]nflation continues to impact our customer as they make trade-offs in the aisle and we anticipate the related sales mix headwind-to-gross margin will continue in 2024," said CFO Dilts.

The stock has run up 16.5% over the past three months, while the S&P 500 has gained 9.3%.

-Tomi Kilgore

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03-14-24 1048ET

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