Investors jumped all over Dollar General (DG) stock this morning on news of a good earnings beat. DG continues to be one of the most consistent plays within retail.
The discount retailer has a well-established trend of annual sales growth, coupled with strong earnings. Within a retail sector where many names have struggled to produce meaningful, same-store sales, Dollar General continues to expand. With more stores on the way, I like the trends here. To me, discount retailers are a little more recession proof than names that command higher price tags for their inventory.
First-quarter revenues included a year-over-year 8.3% increase in net sales to $6.6 billion. One of the nice things about Dollar General's revenue growth was how it was spread between new stores and stores already in operation. Same-store sales increased 3.8%. The company noted the increase was the result of increases in both traffic and transaction amounts. Essentially, the quarter was great from a sales perspective with one exception. Dollar General noted a decline in apparel sales.
When breaking down Dollar General's sales, one will notice that higher costs in distribution and transportation did limit gross profits, which declined 23 basis points to 30.2% of sales. Even after increased costs and expenses, Dollar General reported an increase in operating income of 4.5% to $512.2 million.
Coupled with slightly lower taxes, net income increased 5.47% year over year to $385 million in the first quarter. Thanks in part to share buybacks, income broke down to an 8.8% increase in earnings per diluted share of $1.48. The company still has $1.1 billion left in share buybacks under their current authorization.
As a whole, I'm not always the biggest fan of share buybacks. It uses up cash that could go into other things. In the case of Dollar General, the buybacks haven't put too much of a strain on the balance sheet yet.
DG had over $271 million in cash at the end of the first quarter, and long-term liability obligations actually decreased year over year, and on a sequential quarterly basis. With total equity increasing, the repurchases seem okay thus far. I might critique the fact that they're paying for shares at a high premium, though.
With such a nice performance in the books, the question becomes whether the story can keep going. Based on Dollar General's guidance, things seem solid.
Dollar General anticipates full year net sales growth of 7% in a year where many more upscale retail names are struggling simply to keep sales from falling. These sales are expected to stem from a combination of comp sales gains and new store openings. Same-store sales are expected to grow 2.5%, while Dollar General plans to open 975 new store locations. This continues to support my thesis that discount retailers are great options in a market where many upscale names are shutting stores. Operating income is expected to grow between 4%-6% for the year.
On an earnings basis, diluted earnings per share are expected to be $6.30-$6.50. Going off of that guidance, Dollar General is trading at roughly 20x full year earnings if you use conservative estimates. The stock isn't exactly cheap, but it's not exactly expensive either. A premium is the price you pay for a company that is doing well when others are not. Up over 7% in early afternoon trading, the question of whether to chase DG is more about the broader market than it is about Dollar General alone.
We've seen so much volatility and concern over the ongoing trade dispute with China, the generally late-stage nature of our economic cycle, and the constant attempts by analysts to predict the next recession.
Thanks to these understandable factors, I think there is possible downside for Dollar General if the market as a whole was to experience another correction. However, if we're talking about long term trends and potential, Dollar General seems like an intelligent name to have in the portfolio. There is always a consumer base for discounted products.