Source: Company reports/Coresight Research

4Q17 Results

Dollar General reported 4Q17 revenues of $6.13 billion, up 2.0% year over year but below the $6.21 billion consensus estimate. The 53rd week in calendar 2016 negatively affected the growth rate by approximately seven percentage points. Sales growth was driven by sales from new stores, which were modestly offset by sales lost from closed stores. Comps were up 3.3%, beating the consensus estimate of 2.6%. The comp growth was due to an increase in average transaction value, which was partially offset by a slight decline in customer traffic. Other growth drivers included positive results in the consumables and seasonal categories, which were partially offset by negative results in the apparel and home categories. An increase in SG&A expense as a percentage of sales was primarily due to higher occupancy costs, retail labor expenses and increased incentive compensation, which were partially offset by a reduction in advertising costs. Adjusted EPS was $1.48, down 1.0% year over year and in line with the consensus estimate. GAAP EPS was $2.63, above the $1.49 figure reported in the year-ago quarter, with the difference arising from the US Tax Cuts and Jobs Act. Merchandise inventories were $3.61 billion, an increase of approximately 1.5% year over year on a per-store basis.

FY17 Results

Dollar General’s FY17 revenues were $23.47 billion, up 6.8%, driven by sales from new stores, which were modestly offset by sales lost from closed stores. Comps increased by  2.7%, driven by positive results in the consumables and seasonal categories, which were partially offset by negative results in the home and apparel categories. Adjusted EPS was $4.49, compared with $4.43 in the prior year. GAAP EPS was $5.63 for the year. During the year, the company opened a record 1,315 new stores, which include nearly 300 newly acquired store sites. Dollar General also remodeled or relocated a total of 764 stores.In total, the company completed 2,079 real estate projects in the year, exceeding its initial target of 1,900 projects.

Details from the Quarter

During the fourth quarter:

• The company completed a strategic review of its real estate portfolio and subsequently closed 35 under performing stores, the majority of which were part of the mature store base, having been open five years or more. These closures resulted in pretax expense of approximately $28.3 million, or $0.07 per share, in the quarter.
• The company completed its 15th distribution center in Jackson, Georgia, which began shipping in October of 2017. During the year, the company started construction on its 16th and 17th distribution centers, in Longview, Texas, and Amsterdam, New York, respectively.Dollar General expects to begin shipping from these locations in 2019.

Outlook

In FY18, management anticipates that investments will primarily focus on the acceleration of long-term strategic initiatives and on new store expansion and infrastructure to support future growth. Similar to last year, the company plans to strategically align investments in 2018 with its ongoing operating priorities. The company plans to prioritize capital spending on new stores, remodels and relocations, as well as on the two new distribution centers that are under construction. Additionally, management plans to accelerate capital spending on selected infrastructure projects and other key initiatives. In FY18, the company also plans to test bold new assortments and expanded assortments in key categories. The company seeks to enhance the treasure hunt experience by offering a new, differentiated,limited assortment that will change throughout the year. The company will display the new offering in high-traffic areas to enhance the in-store experience. It will also continue to deliver value by pricing the majority of offerings at $5 or below. These changes will initially be tested in approximately 700 store locations. The goal of the company’s long-term growth model (introduced on March 10, 2016) remains the same: grow adjusted, diluted EPS at a rate of 10% or higher. For FY18, management expects:

• Net sales to increase by 9% (compared with the 8.1% consensus estimate).
• Comps in the mid-2% range.

EPS of $5.95–$6.15, above the consensus estimate of $5.63.