DG eyes another year of record expansion

Dollar General fined tuned its full year sales and profit forecast following better than expected third quarter results that also flashed a few warning signs.

Third quarter same store sales at Dollar General increased 4% thanks to a blend of increased customer traffic and average transaction size while earnings per share of 62 cents were two cents better than analysts forecast. Total sales increased 10.3% to nearly $4 billion and profits increased 21.6% to $208 million. The store base swelled to 10,371 units as the company has opened 479 stores so far this year and is on track to open approximately 625 stores followed by 635 new units next year.

Dollar General chairman and CEO Rick Dreiling characterized the performance as solid, even through it wasn’t solid enough to bring the company’s full year profit outlook up to the level forecast by analysts.

"Dollar General delivered another solid quarter, and we expect to continue building on our strong track record of success," said Rick Dreiling, chairman and CEO. "Our same-store sales increased 4%, on top of a 6.3% improvement in the third quarter of 2011 for a two-year stack of 10.3%. We had great financial performance across key metrics. Based on these results, we are now forecasting our full year adjusted earnings per share to be in the range of $2.82 to $2.85."

The upper end of that range remains a penny below analysts’ consensus estimate as the company simply brought up the bottom end of the range from $2.77 to $2.82. The same was true of the comp forecast. Dollar General tightened its full year comp forecast to a range of 4.5% to 5%, despite forecasting a fourth quarter increase in the range of 3% to 4%. The company had previously said its full year comps would increase in the range of 3% to 5%, but that range was narrowed to 4% to 5% when second quarter results were announced in early September.

While the 4% third quarter increase was within the company’s narrowed forecast range, it was well below the prior year increase of 6.3% and also marked a sequential deceleration from the 5.1% comp increase in the second quarter. A similar situation is shaping up for the fourth quarter where Dollar General’s forecast range represent further sequential deceleration and is well below the prior year’s fourth quarter comp increase of 6.5%.

The company’s sales continue to be driven by growth in consumables with the most significant third quarter growth coming in candy and snacks and perishables areas. The company also reported that sales growth in home and seasonal categories, as well as certain basic apparel departments, was strong while sales of hanging apparel were weak.

"Although our performance over the Thanksgiving weekend and start of the holiday season has been encouraging, we continue to be cautious for the remainder of the year," Dreiling said. "We are facing a significant same-store sales comparison from our 2011 fourth quarter, which included very strong January sales, growing near-term pressures that are impacting our customers' confidence and spending, and a challenging competitive environment. Dollar General is keenly focused on our ability to capture market share, build and maintain customer loyalty and deliver strong financial returns that support our sustainable growth for the long term."

The company’s operating margin rate expanded to 9.1% from 8.6% during the third quarter as a 10 basis point decline in gross margins to 30.9% was more than offset by an expense rate that fell to 21.8% of sales form 22.4%.

The company said the expense rate reduction was partially due to ongoing benefits of a workforce management system and a decrease in incentive compensation. That combination is potentially troubling from a longer term standpoint. Dollar General’s expansive network of small stores are already thinly staffed which suggests there is little room for a workforce management system to extract further productivity gains without negatively affecting customer service, turnover and shrink levels. Coupled with the fact that incentive compensation declined it doesn’t sound like a favorable environment in which to recruit, retain and engage front line employees needed to facilitate what is expected to be another year of record growth in 2013.