Dollar General shares jump after surpassing low expectations, can it hold gains?
Dollar General Corporation, a prominent discount retailer in the United States, released its financial results for the fourth quarter (Q4) of fiscal year 2023, reporting mixed performance amid challenging market conditions. Expectations were low for DG as peer Dollar Tree (DLTR) posted a disappointing round of results yesterday morning.
DG"s performance for the quarter surprised to the upside which likely caused a squeeze as traders were leaning short ahead of the news. We would note that the DG guidance was a little weaker and that is why the stock is having such a difficult time holding gains. We would have this name on the short radar for a potential reversal given the heavy trading in the overall market as the 10-year Yield rises to 4.25%.
While the company's net sales decreased by 3.4% year-over-year (y/y) to $9.86 billion, it managed to beat the consensus estimate of $9.78 billion. Earnings per share (EPS) fell from $2.96 in the previous year to $1.83, but still managed to surpass the consensus of $1.73.
Same-store sales growth of 0.7%, beating the estimate of -0.98%. The company has also forecasted a similar trend for fiscal year 2024 (FY24), predicting a comp sales increase of 2% to 2.7%, with an upside of 5% compared to the estimate of 1.4%.
Gross margin for the quarter contracted by 138 basis points (bps) to 29.5%, below estimates of 29.9%. Selling, general, and administrative (SG&A) expenses as a percentage of revenue increased by 211 bps to 23.6%, also missing Street expectations of 24%. As a result, Dollar General's operating profit decreased by 38% y/y to $579.7 million, just barely beating the FactSet Consensus estimate of $576 million.
In terms of earnings guidance, Dollar General provided a downside outlook for Q1 of 2024 (Q124), anticipating EPS of $1.50 to $1.60, significantly below the FactSet Consensus estimate of $1.88. The company expects same-store sales growth in the range of 1.5% to 2.0% for Q124.
For FY24, Dollar General forecasts EPS of $6.80 to $7.75, below the consensus estimate of $7.42. The company projects a revenue growth of 6.0% to 6.7% y/y to a range of $41.0 to $41.3 billion, also missing Street expectations of $40.27 billion. Same-store sales growth is expected to be in the range of 2.0% to 2.7%.
Overall, Dollar General's Q423 earnings report showcased the company's resilience in the face of market challenges. While the gross and operating margin trends were under pressure, the positive comp and traffic trends bode well for the company's future growth prospects. However, the soft 1Q24 profit outlook highlights that the road to recovery may still be bumpy. As the company progresses through 2024, market watchers will be closely monitoring its ability to improve profitability, capitalize on market share gains, and execute on its real estate plans.