Dollar General Corp. (NYSE:DG) had a solid Christmas season, handily beating earnings estimates for its fourth quarter beat earnings estimates. DG stock isn’t flying on the news, but it is ticking higher, and should reward investors down the road.
Dollar General said it grew profits 15% to $414 million ($1.49 per share) on revenue of $6 billion for the three months ending Feb. 2. Analysts had been expecting earnings of just $1.41 per share. The company also said it would hike its dividend 18% to 26 cents per share.
DG stock responded with a quick 4% jump in Thursday’s premarket trade before cooling off ahead of the opening bell.
Still, the result justified the faith of analysts like MKM Advisors, which called Dollar General shares a “long-term winner” less than a week ago. Those who thought good economic times might hurt results — and I was one of them — were forced to re-polish their crystal balls and take the criticism.
The lesson seemed clear, and augured well for Dollar General (and its competitors) going forward.
Lower-Income Folks Still Like Stores
While middle-class retailers like Macy’s Inc (NYSE:M) and Target Corporation (NYSE:TGT) are hit hard by online competition — especially from Amazon.com, Inc. (NASDAQ:AMZN) — people with limited means still shop at brick-and-mortar stores.
Even the bad news at Dollar General had a silver lining, because based on its numbers, the Christmas season was very good for its customers.
Gross profit as a percentage of sales fell from 31.8% to 31.6%, but this was due to higher sales of consumables, meaning buyers were coming into the stores regularly. Same-store sales rose 1% because people spent more. The company had to take markdowns on seasonal merchandise and apparel, dropping prices to move the merchandise, as many customers found they had choices for Christmas goods.
Selling, general and administrative expenses (SG&A) were up slightly, by 0.06%, as the company found it had to pay people more. There was a small gain of $4.5 million as the company moved out of 12 stores and moved into former Wal-Mart Stores Inc (NYSE:WMT) Walmart Express locations.
Dollar General’s dominance within its niche, in short, was unquestioned, and while the people in that niche were pickier, able to get rides to other stores if they didn’t like the pricing of Christmas goods at Dollar General, they were coming in regularly and buying more basic merchandise when they did come in.
A Real Surprise
The results were not at all what most analysts were expecting, which explained the abrupt rush into the stock before the calm hit.
One analyst who had a “buy” rating on DG stock still thought earnings would come in 6 cents per share lower than they did. The company’s guidance for 2017 was to expect 4%-6% sales growth and net income of $4.25 to $4.50 per share.
Another analyst, who had a hold rating on Dollar General, said recently he would change his view based on same-store sale increases, food price deflation and better-than-expected profitability, all of which the company delivered. That analyst may not change their rating, however, as they also wanted Dollar General stock to trade lower before jumping on board.
That’s not going to happen based on the reported numbers.
The Bottom Line for DG Stock
The bottom line on Dollar General was that it can perform in good times as well as bad, adjusting on-the-fly to changing consumer behavior and locking down its niche as a regular stop for rural and inner city consumers.
This morning, some of the optimism might be tempered by the retirement (effective April 15) of Chief Merchandising Officer James W. Thorpe, who returned to the company in 2015 and laid down an effective strategy that likely will be missed.
Still, those who are patient with Dollar General will be rewarded, and DG stock should trade at a price to earnings ratio in line with that of the market over the next several months, regardless of what happens to the general economy.
Dana Blankenhorn is a financial and technology journalist. His latest novel is Bridget O’Flynn vs. Something Big & Ugly. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he did not hold a position in any of the aforementioned securities.
