On Monday, Dollar General (DG) reported solid fiscal third-quarter results and raised its fiscal 2011 earnings guidance range. Though we liked the performance, we think the firm’s shares remain fairly valued at this time.
The firm’s total revenue increased 11.5% on the heels of same-store sales expansion of 6.3%, which represented its third consecutive quarter of accelerated growth (and up 2.1 percentage points from the year-ago period). The company noted strength in lower-margin consumable sales, with particular expansion in candy and snacks, perishables, packaged foods, health and pet supplies. Total merchandise inventories, at cost, only increased 5% on a per-store basis, reflecting decent inventory management.
Dollar General’s operating profit jumped 13% as its operating margin nudged up modestly in the period (8.6%), with weakness in the firm’s gross margin offset by reduced SG&A expenses as a percentage of sales. Adjusted net income advanced 29% to $0.50 per diluted share in the quarter–which came in higher than consensus expectations ($0.47)—thanks to profit strength (internal sales expansion and cost controls) and lower debt costs.
Though the firm indicated that discretionary apparel remained weak, Dollar General had some positive commentary about November sales, indicating that its Thanksgiving week and Black Friday sales were strong. As a result, Dollar General raised its full-year 2011 earnings guidance to the range of $2.29 to $2.32, up from the range of $2.22 to $2.30. Embedded in this yearly guidance are expectations for comparable same-store-sales growth of 5.6% to 5.8% and the opening of approximately 625 new stores for the year. For fiscal year 2012, the company plans to continue its rapid pace of new-store expansion and plans to open up 625 new stores during the year (implying a net square footage increase of about 7%). The firm also announced a $500 million stock-buyback program (including the re-purchasing of $185 million worth of shares from Buck Holdings, L.P.), a move we are neutral on, given our valuation of the company.