What's Missing in Dollar General's Strong Quarter?

Dollar General Corp. (NYSE: DG) reported third-quarter 2020 results before markets opened Thursday. The discount retailer reported diluted earnings per share (EPS) of $2.31 on revenues of $8.2 billion. In the same period a year ago, Dollar General reported EPS of $1.42 on revenue of $7.0 billion. Third-quarter results also compare to consensus estimates calling for EPS of $2.00 and $8.15 billion in revenue.

Same-store sales increased by 12.2% year over year due to higher transaction amounts, partially offset by a drop in customer traffic. The company said the biggest gain in same-store sales came in the home products category and that COVID-19 had a “significant positive impact” on both net sales and same-store sales.

Operating profit rose by 57.3% to $773.1 million, including incremental investments of about $38 million in protection measures for store employees and approximately $25 million in bonuses for front-line workers.

Capital spending in the first three quarters of the year totaled $698 million. During that period, Dollar General opened 780 new stores, remodeled 1,425 stores and relocated 76 stores. CEO Todd Vasos commented that the company had completed 765 real estate projects in the quarter and that Dollar General is well-positioned “to continue delivering value and convenience for our customers, along with long-term sustainable growth and value for our shareholders.”

Dollar General repurchased 4.4 million shares of common stock during the quarter, at an average price of $204.58, and has $1.6 billion remaining in its authorized buyback plan. The company also paid a quarterly dividend of $0.36 per share. At the end of the quarter, Dollar General reported $2.2 billion in cash and equivalents and $5.0 billion in merchandise inventories.

The company did not update its fiscal year guidance but did say that it expects full fiscal year stock buybacks to total about $2.5 billion. (Dollar General has repurchased $1.7 billion in stock so far in the fiscal year.) The company also expects capital spending to total $1.0 billion to $1.1 billion for the year and to close the year with 2,780 real estate projects. For the 2021 fiscal year, Dollar General expects to complete 2,900 real estate projects, including 1,050 new stores, 1,750 remodeling projects and 100 relocations.

Analysts have forecast fourth-quarter EPS of $2.55 on sales of $7.71 billion. For the full fiscal year, consensus estimates call for EPS of $10.25 and sales of $33.3 billion.

The lack of fiscal year guidance may be causing some concern among investors, but when competitor Dollar Tree Inc. (NASDAQ: DLTR) announced results last month without guidance, the shares jumped by more than 10%. Dollar General’s capital spending also may be figuring into the mix, with investors looking for a better dividend yield than 0.66%.

Dollar General stock traded down about 1.7% in Thursday’s premarket session, at $213.75 in a 52-week range of $125.00 to $225.25. The consensus price target on the stock is $228.31.

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