Dollar General on Tuesday reported that third quarter net sales rose 8.7% to $6.4 billion, up from $5.9 billion in the year-ago quarter, thanks to "sales contributions from new stores and growth in same-store sales, modestly offset by the impact of store closures," according to a company press release.
Same-store sales rose 2.8% from a year ago, driven by an increase in average transaction amount and positive results in the consumables, seasonal and home categories, partially offset by sales declines in apparel, the company said. Foot traffic was "essentially flat," according to the release.
Gross profit as a percentage of net sales in the quarter inched down 39 basis points to 29.5% from 29.9% a year ago. The decrease was primarily due to a change to inventory accounting, a greater proportion of sales from lower-profit consumables, higher markdowns and rising transportation costs. Those were partially offset by an improved rate of inventory shrink, the company said. Net income in the quarter rose to $334 million from $253 million a year ago, the company said.
In a statement on Tuesday, CEO Todd Vasos kept his focus on "strong top-line growth and remained focused on expense control," noting that the discount dollar retailer "achieved our highest two-year same-store-sales stack in 11 quarters."
But freight costs are weighing on the company as they are on other retailers, and the company lowered its guidance. For fiscal year 2018, Dollar General now expects net sales to grow about 9%, down from its previous expectation for 9% to 9.3%, and expects same-store sales to rise in the middle of its previous range of mid-to-high 2%, according to its release.
Wells Fargo analysts in comments emailed to Retail Dive called the retailer's third quarter "somewhat of a disappointment but certainly not terrible."
"Comps were solid, flow through was much better than what we have seen elsewhere in our coverage universe, and there was always a little 'too good to be true' aspect to how [Dollar General] was managing freight," analysts led by Edward Kelly wrote. "We remain optimistic around the 2019 outlook, as the company's low-income consumer should remain strong and freight pressures may be peaking."
In the company's earnings call, it highlighted long-term strategic growth initiatives like its cooler expansion, particularly in mature stores. By the end of Q3 the company had added 20,000 cooler doors across its mature store base in 2018 and will continue this effort in 2019. In addition, the company's recently launched a Better For You initiative that offers consumers healthier food options at a low cost and is performing above Dollar General's initial goals.
Currently, around 2,000 stores carry Better-For-You products which includes the retailer's new Good & Smart private label brand. In the last four-week period of this quarter, half of the company's top 10 unit movers were Better For You items, including Good & Smart branded items. Private label sales across the industry have increased as consumers have become less brand loyal and private brands have improved in quality, as well as the incorporation of healthier ingredients. The grocer plans to roll out its private label brands to more stores in 2019 and plans to refine its advertising campaigns that highlight these offerings.
The company on Tuesday reiterated plans for 900 new store openings, 1,000 store remodels and 100 relocations this year. Dollar General aims to execute on those projects by January 2020. This year through the end of the third quarter, the discount retailer has opened 750 new stores, relocated 92 stores, and remodeled 925 stores, 359 of which were remodeled into the Dollar General Traditional Plus (DGTP) format which is a typical store with an expanded cooler count. Of these DGTP stores, 107 stores have a fresh produce section resulting in higher sales. In an earnings call earlier this year, Vasos said "thousands" of Dollar General stores could eventually see an assortment of produce and other grocery selections.
Dollar General will record greater-than-anticipated expenses related to hurricanes in the second half of the year, according to CFO John Garratt. "Despite these challenges, we expect to deliver our 29th consecutive year of same-store-sales growth with strong net sales, [earnings per share] and cash flow growth," he said in the release.