Chain benefits from higher consumer spending
Same-store sales in the quarter ended May 5 climbed 0.7%, just above the 0.6% increase projected by analysts. Expenses rose 8.2% on higher wages and training for store managers, but the company cut back on outlays for advertising.
The retailer’s net income slipped 5.3% to $279.5 million, or $1.02 per share, from $295.1 million, or $1.03 per share, a year earlier. It took a charge of 1 cent per share on early retirement of long-term debt.
The $1.03 per share, which excluded one-time items, topped analysts’ prediction of $1 per share. And net sales of $5.61 billion (up 6.5%) exceeded analysts’ expectation of $5.59 billion.
“I am pleased with our earnings results, which reflect solid management of the business in a difficult retail environment as we overcame our most challenging comparisons from the prior year,” said chief executive officer Todd Vasos. “Our same-store sales improved as we moved past the delay in income tax refunds and the timing shift of the later Easter holiday. We continue to execute on our focused strategy and implement our operating initiatives, which we believe will improve customer traffic and transactions.”
Same-store sales were aided by an increase in average transaction, partially offset by a decline in traffic. They were also driven by positive results in the consumables and apparel categories, partially offset by negative results in the home and seasonal categories.
Gross profit, as a percentage of net sales, was 30.3% in the quarter compared to 30.6% a year earlier, a decrease of 34 basis points. The slide was primarily attributable to higher markdowns, mainly for inventory clearance and promotional activities; a greater proportion of sales of consumables, which tend to have a lower gross profit rate as compared to nonconsumables; and the mix within consumables. Partially offsetting these items were higher initial inventory markups.
Selling, general and administrative expense as a percentage of net sales was 21.8% in the quarter compared to 21.5% a year earlier, up 34 basis points. The SG&A increase was primarily attributable to increased labor costs, largely as a result of pay hikes for store managers, and occupancy costs, which increased at a rate greater than the increase in net sales. Partially offsetting these costs were a reduction in advertising costs and lower waste management costs resulting from recycling efforts.
Net income and diluted earnings per share were $279 million and $1.02, respectively, compared to $295 million and $1.03 in the year-ago period. Diluted EPS includes a charge of about 1 cent related to the early retirement of long-term obligations.
As of May 5, total merchandise inventories, at cost, were $3.30 billion, compared to $3.07 billion as of April 29, 2016, an increase of 0.5% on a per-store basis.
Total additions to property and equipment in the quarter amounted to $144 million; including $54 million for distribution and transportation-related capital expenditures; $50 million for improvements, upgrades, remodels and relocations of existing stores; and $35 million related to new leased stores, primarily for leasehold improvements, fixtures and equipment.
During the quarter, the retailer opened 293 new stores and remodeled or relocated 301.
For the full fiscal year ending February 2, 2018, GAAP diluted EPS is forecasted to remain consistent with the prior guidance range of $4.25 to $4.50. The projection takes into account the anticipated closing of Dollar General’s purchase of 322 Family Dollar stores from Sycamore Partners, which would lift net sales by 5% to 7% as compared with the prior guidance range of 4% to 6%. Capital expenditures for fiscal 2017 are expected to be in the range of $715 million to $765 million as compared with the prior guidance of $650 million to $700 million. Same-store sales growth is unchanged from the prior range of slightly positive to an increase of 2%.
Share repurchases for fiscal 2017 continue to be forecasted at around $450 million.
For fiscal 2017, assuming the closing of the acquisition, Dollar General plans to open about 1,290 stores in addition to remodeling or relocating 760, and to reduce remodelings and relocations by 140 to allow for organizational capacity to execute the incremental new store growth anticipated to result from the pending acquisition.