Dollar General (DG) stock is getting a discount on Tuesday morning as investors look to the fourth quarter and beyond.
Shares of the Goodlettsville, Tennessee retailer fell by more than 9% at their lows in pre-market trading hours, marking a strong reaction to its earnings release despite top and bottom line beats for the November 2-ended quarter as well as strong same-store sales growth.
However, margins fell in the third quarter, affirming some analyst concern on freight costs and sales of lower-margin goods.
The company reported that gross profit as a percentage of net sales was 29.5% in the third quarter of 2018 compared to 29.9% in the third quarter of 2017, a decrease of 39 basis points.
"This gross profit rate decrease was primarily attributable to an increase in the LIFO provision, a greater proportion of sales coming from the consumables category, which generally has a lower gross profit rate than other product categories, sales of lower-margin products comprising a higher proportion of sales within the consumables category, higher markdowns, and increased transportation costs," the company explained.
The transportation costs carrying through negatively were highlighted by analysts as contrary to forecasts, fueling the downside to the stock.
"We have assumed that DG continues to manage through freight pressure as it has so far this year," Wells Fargo analyst Edward Kelly wrote in a note previewing the earnings release. "Market concerns here have increased, but a disappointment on freight would still result in downside to the stock in our view."
That downside prediction has indeed come to fruition.
Building on the margin concerns, the company's lowered guidance figures are an issue that comes into play at the same time that tariff talks come into question in a "he said, Xi said" situation.
"During the third quarter, we delivered strong operating performance and financial results," said CEO Todd Vasos. "I am particularly proud of our team's dedication to our mission of Serving Others, which was on display this quarter as employees across our organization rallied to help our communities in need during the aftermath of two devastating hurricanes."
Dollar General's effort to aid communities in need should not be underplayed, but the impact of reduced spending in these communities and the negative profit effect expected is pushing shares downward amid lowered guidance.
The retailer now expects 9.0% sales growth for the full fiscal year versus its prior outlook of 9% to 9.3% and lowered its earnings per share guidance to $5.85 to $6.05 from its previous $5.95 to $6.15.
The retailer's stock has had a tremendous 2018 year to date, up over 20%, but forecasts suggest that pressures on margin and profit that are largely out of the hands of management could make that an exceedingly difficult feat to replicate.
Management will look to mitigate these potential impacts in the minds of analysts during the company's third-quarter earnings call at 10:00 a.m. ET on Tuesday.
The webcast will be available here.