Expectations elevated at Dollar General
It’s been one extreme or another the past few weeks in the retail world. First, luxury retailers Tiffany and Saks reported strong sales and profits and then on Tuesday Dollar General results showed the low-end consumers have some spending power and a taste for its brand of discount retail.
Sales increased 11.2% to $3.58 billion at the company’s 9,641 stores, same-store sales increased 5.9%, and net income increased 25% to $181 million, excluding non-recurring charges related to the early repayment of debt. On that same basis, earnings per share increased to 52 cents, four cents better than analysts expected and nearly 24% higher than the prior year profit of 42 cents.
Analysts noted the positive variance was due to such wide ranges of factors as the better-than-expected 5.9% same-store sales increase, less-than-expected gross margin contraction and effective expense leverage.
“Our same-store sales increase of 5.9% in the quarter represents an acceleration from the first quarter and demonstrates our ability to balance the challenges of pricing and rising input costs. Our customers are depending on us even more for the convenience and value we offer,” said Rick Dreiling, Dollar General chairman and CEO. “In this period of economic uncertainty, we continue to focus on factors that we can control, and we still expect to deliver strong financial performance in 2011.”
Accordingly, the company increased it full year profit guidance to incorporate the second quarter results and now earnings per share are expected to fall within a range of $2.22 to $2.30.
Dreiling noted that the company’s sales momentum was driven by increases in customer traffic and average transaction size with sales in consumable product categories growing at a faster rate than non-consumables. The most significant growth was related to changes in and further expansion of the company’s candy and snacks, packaged foods, and perishables offerings. Slower sales growth seen in home, apparel and seasonal categories was attributed to less discretionary spending by consumers.
With increased sales of consumables, a decline in the company’s gross margin rate was expected, but the magnitude was not as great as analysts feared, dropping to 32.1% in the second quarter from 32.2% the prior year. Conversely, expenses as a percent of sales show greater improvement, declining to 22.3% from 22.9%. The company said a key driver of the improvement was reduced store labor expense as the company has implemented a labor management program and simplified some of its merchandising processes.
At the midpoint of its fiscal year, Dollar General has opened 301 new stores and remodeled or relocated 371 others, putting the company on track to open approximately 625 new stores and remodel or relocate 575 others.