Dollar General earnings update for the first quarter of 2024

“General Dollar (New York Stock Exchange: General Directorate) Its stock had an interesting reaction to Thursday’s earnings. It initially rose about 6% pre-market, but ended the day down 5%.

I already wrote about it in the last quarter update and it’s surprising that this happened even more Or less frequently in this quarter as well. The stock initially rose about 8%, but is currently trading down 7%.

Here are some highlights from today’s call.

Same store sales (SSS)

After three consecutive quarters of tepid SSS growth, DG returned to a healthier 2.4% SSS growth in Q1 2024. As in Q4 2023, SSS was again driven by customer traffic growth of 2.4% +4%. This was offset by a decrease in the average. Transaction amount, which was driven by fewer items per basket. DG traffic saw negative growth in 2020, 2021, 2022 and in the first half of 2023. Since then, traffic has returned to a positive trend which is an encouraging sign. Furthermore, the GM continues to experience business declines:

As we saw in the fourth quarter, what we’re seeing is that the next group and the one above that, so let’s call it middle to upper income and then in some of the upper income strata, we’re seeing the trade still come down. So we feel good because we are receiving new clients. We can see that in our data, that we retain at a high level those of our core customers in those lower income strata

The increase in SSS was entirely driven by the consumables category and was partially offset by the decrease in non-consumables (household, seasonal and clothing categories). After non-consumables grew faster than consumables during 2020, it has been nearly 10 consecutive quarters of year-over-year sales decline in non-consumables (excluding Q4 2022)!!

The managing director says the non-consumer category is under pressure as consumers show more cautious behavior in their discretionary spending. I wonder if Timo’s rise has contributed to their struggle in selling discretionary items.

gross profit margin

Since the non-consumer segment is a relatively higher margin segment, the mix shift has hurt DG’s overall gross margin. Gross margin decreased by 145 basis points year over year. Aside from the shift in mix, shrinkage and higher-than-expected markdowns contributed to gross margin pressure:

“Conflation remains our most significant headwind and was 59 basis points worse in the first quarter than a year earlier. In terms of write-downs, we are seeing promotional levels more similar to 2019 levels, as we expected entering the year.”

Shrink

To combat the downturn, DG has transitioned 12,000 stores (about 60% of total stores) away from self-checkout so far this year. Going forward, DG plans to provide self-checkout options in a limited number of stores, mostly higher-volume, low-shrinkage locations.

The GM’s management seems a bit cautious when it comes to talking about downsizing. While the CEO said at some point “What we are seeing on the contraction front now is what we thought we would do,” he said. The CFO clearly indicated otherwise during the call:

…The contraction is currently on track to be worse than we initially expected at the start of the year, and we now expect these headwinds to be greater in 2024 than originally anticipated in the financial guidance we provided in our March earnings call. We are taking aggressive and decisive action to mitigate this challenge, and we expect to see improvement later in the back half of 2024 than we previously expected and, more importantly, in 2025.

Once self-checkout options become more limited, it is very likely that we will see a bottoming out at some point by this year.

Operating margin

While DG’s operating margin bottomed out in 3Q23, and came back around 6% in 4Q23, it went a bit in the wrong direction this quarter. E&S increased 97 basis points year-over-year driven by retail labor, depreciation and amortization, incentive compensation, and repairs and maintenance.

barren

Inventories were $6.9 billion in Q1 2024, down -5.5% year over year and down 9.5% on a per store basis. Nonconsumables inventory was -19.1% year over year and -22.5% on a per store basis.

Expand the store

DG has made a slight change in the pace of its store expansion. While they initially guided for 800 new store openings this year, they have cut the number to 730. They now expect 1,620 store remodels this year compared to the previous forecast of 1,500 remodels.

Prospects

The Director General’s forecasts for 2024 remain the same:

We are reiterating our fiscal 2024 guidance and continue to expect net sales growth in the range of approximately 6% to 6.7%, same-store sales growth in the range of 2% to 2.7%, and EPS in the range of $6.80 to $7.55. . This guidance continues to assume an estimated negative impact to EPS of approximately $0.50 due to higher incentive compensation expense and an effective tax rate in the range of approximately 22.5% to 23.5%.

Although not typically guided by quarter, DG provided more color in Q2 2024. SSS guidance for Q2 2024 is a low 2% range and EPS guidance is $1.7-1.85.

Final words

While the traffic and SSS trend remain very encouraging, it is disappointing to see operating margin trending in the wrong direction. Looking at consensus estimates, it’s clear that the market does not expect DG to return to its previous operating margin days of 8-9%. As a shareholder, I don’t agree with the market pessimism here, but I’m concerned that the longer it takes DG to return to the days of ~8% operating margin, the more unlikely it is that they will return and maintain that margin. As a result, I draw a hard line. If the MD fails to post an operating margin of more than 6.5% by 2025, I will unlikely remain a shareholder.

In-depth reading: Dive deeper into DG (August 2023)

Disclosure: I own stock in Dollar General