Earnings Preview: Solid comp-store sales to lift Dollar General’s Q4 earnings

Dollar General Corporation (NYSE: DG) plans to announce its fourth quarter results on March 14 before the market opens. Investors would expect the discount retailer to report solid Q4 earnings as it’s a seasonally strong quarter due to the holiday season. The retailer’s stock has increased by nearly 35% over the past 12 months as it continues to report solid comps growth.

For the Q4 period, analysts expect sales to improve 7.7% to $6.6 billion over the prior year period and adjusted EPS is expected to jump 27% to $1.88. It’s worth noting that the earnings forecast is despite the fact that Dollar General has alerted last quarter that it would be recording a $0.04 earnings impact in Q4 due to hurricane-related expenses.

Thanks to increased traffic and average ticket size improvement, same-store sales improved 2.8% last quarter. Earnings rose 35.5% to $1.26 per share driven by 8.7% sales improvement in the third quarter. The retailer recorded a $0.05 impact on earnings due to disaster-related charges in the Q3 period. Increase in expenses forced the firm to reduce its earnings outlook for the fiscal 2018 period. EPS is expected to be between $5.85 to $6.05 and sales to witness a 9% jump over last fiscal year.

One of the key metrics tracked by the street when it comes to the retail industry is same-store sales. Analysts would be expecting Dollar General to continue its momentum from the last quarter. With seasonality in its favor, the retailer is poised to report yet another strong comp growth in the fourth quarter.

Related: Walmart Q4 earnings

Consumables section brings in 78% of revenue to the retailer helped by increased traffic and sales. Since this is a lower margin business the company has taken various efforts to improve its profitability. It has focused on reducing inventory, increase private brand reach, refresh the category based on the user needs, and improve transportation and distribution efficiencies, cut down costs. These efforts are going to augur well for the firm in the near future.

Non-consumables generally bring in higher margins, which have resulted in improved margins and average transaction amount. In order to protect its margins, Dollar General has been investing in new digital tools, enhance the shopping experience and revamp its merchandising strategy to add value to its customers.

To capture the increasing customer demand, the retailer has been increasing its store count at a brisk pace. In the current fiscal period, Dollar General plans to open 900 new stores, relocate 100 and remodel 1,000 stores. For the next fiscal, new store openings are going to be 975 with 100 and 1000 stores getting relocated and remodeled respectively. The increased footprint and store remodeling are going to boost the top and bottom line of the firm in the next fiscal period.

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When it comes to headwinds, increase in expenses has been a concern. Margins are under pressure due to a surge in SG&A expenses due to higher wages, rental costs and utility expenses. Apart from this, the discount retailer is facing intense competition from online retailers like Walmart (WMT), Dollar Tree (DLTR) etc. on the pricing front which would hurt market share.

Shareholders would be interested in knowing from the management on Thursday how the company is going to tackle headwinds amidst the existing macros.