February 22, 2024

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Dollar General’s sales and profits climb in Q3

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GOODLETTSVILLE, Tenn. — Dollar General Corp.’s third quarter operating profit rose 10.5% to $735.5 million, as sales climbed 11.1% to $9.5 billion.

Same-store sales for the period ended October 28 advanced 6.8%.

“We are thankful to our team for their continued dedication to serving others, particularly in a challenging economic and operating environment,” said Jeff Owen, who became Dollar General’s chief executive officer on November 1. “We are pleased with our strong sales growth in the quarter, as well as a modest increase in customer traffic and continued share gains in both consumable and nonconsumable product sales, all of which we believe are a testament to the strength of the value and convenience proposition we offer our customers.”

Diluted earnings per share increased 12% to $2.33, but missed Wall Street’s estimate of $2.55. Revenues of $9.46 billion topped the Zacks consensus estimate by 0.32%.

“Despite the cost pressures we experienced during the quarter, as well as challenges within our internal supply chain resulting in higher-than-anticipated distribution and transportation costs, our team was resilient and worked hard to deliver double-digit diluted EPS growth,” said Owen, who had been chief operating officer before succeeding Todd Vasos as CEO. “We believe the majority of these and other gross margin pressures are largely temporary, and we are confident in our plans to drive greater supply chain efficiencies moving forward.”

The retailer continued to make progress on strategic initiatives and operating priorities during the quarter, including executing nearly 800 real estate projects, Owen added. He announced plans for some 3,170 real estate projects in the U.S. in fiscal 2023, including about 1,050 new stores. “We are excited about our plans to extend our ability to serve more customers, and believe we are well positioned to continue delivering long-term sustainable growth and value for our shareholders,” he said.

The sales increase was primarily driven by contributions from new stores and growth in same-store sales, partially offset by the impact of store closures. The same-store sales gain primarily resulted from an increase in average transaction amount, as well as a modest increase in customer traffic. The increase reflected growth in the consumables category, partially offset by declines in the apparel, seasonal and home products segments.

Gross profit as a percentage of net sales was 30.5% compared to 30.8% in the year-ago period, a decrease of 27 basis points. The drop was largely attributable to an increased LIFO provision, which was driven higher by product costs; a greater proportion of sales coming from the consumables category, which generally has a lower gross profit rate than other product categories; and increases in distribution costs, markdowns, inventory shrink and damages, partially offset by higher inventory markups.

Selling, general and administrative expenses as a percentage of net sales were 22.7% compared to 22.9% last year, a decline of 23 basis points. The primary expenses that were a lower percentage of sales this year were retail labor, incentive compensation, hurricane-related disaster expenses and occupancy costs, which were partially offset by certain expenses that were a greater percentage of sales, including utilities, repairs and maintenance, and travel and training costs.

The effective income tax rate was 22.8% compared to 22.2% a year earlier. This was primarily due to a reduced benefit from stock-based compensation, partially offset by a lower effective state income tax rate.

Dollar General reported net income of $526.2 million for the quarter, an increase of 8% compared to $487 million in the 2021 period.

Unanticipated delays in adding temporary warehouse space reduced internal supply chain efficiencies during the quarter. This resulted in higher-than-anticipated supply chain costs, including fees incurred for delays in returning shipping containers and higher transportation costs caused by the need to service stores from suboptimal distribution center alignments.

As a result of these gross margin pressures, which the company believes will continue to a lesser degree through the fourth quarter, as well as those related to sales mix, inventory shrink and damages, Dollar General lowered its profit outlook for the 53-week fiscal year ending February 3.

Diluted EPS is expected to be between $3.15 and $3.30 for the fourth quarter, which would result in growth of approximately 7% to 8% for the year 2022; that is down from the previous forecast of 12% to 14%. Both the current and previous ranges include an estimated benefit of approximately four percentage points from the 53rd week.

The diluted EPS guidance assumes an effective tax rate toward the upper end of the previously provided range of 22.0% to 22.5%, and capital expenditures — including those related to investments in strategic initiatives — of about $1.5 billion.

Additionally, the company narrowed expectations for same-store sales growth and capital expenditures. It now expects same-store sales growth of approximately 6% to 7% for the fourth quarter, which would result in growth toward the upper end of its previously expected range of 4.0% to 4.5% for the full year.

Dollar General continues to expect full-year sales growth of approximately 11%, including an estimated benefit of some two percentage points from the 53rd week and share repurchases of approximately $2.75 billion.