In Limbo: Dollar General (NYSE:DG)’s future market position relies on acquisition deal


Results were slightly disappointing as Dollar General (NYSE:DG)’s quarterly revenue reported on August 8th came short of estimates by analysts. Moreover, the company’s acquisition proposal to Family Dollar (NYSE:FDO), in hopes to up their sales, did not see a favorable response. A deeper look into the last quarter’s figures may give clarity to where Dollar General (NYSE:DG) is possibly headed.


While it cannot be denied that the company’s revenue increased by 7.50% – from $4.39 billion to $4.72 billion – the figure came short of the predicted $4.77 billion by analysts. Improvement was undeniably seen in the comparable-store sales for the previous 26 quarters due to the increase of in-store traffic and average ticket size with annual metric rises by 2.1%. However, it was below the 2.9% rise prediction.


Dollar General (NYSE:DG)’s store sales were strongest in May with annual growth of more than 3.5%. Sales wavered in June and July as economic uncertainties prompted consumers to spend less.


The quarter’s strong store sales comprised of low-margin consumables like tobacco, candy, snacks, and carbonated beverages, which surpassed the growth of non-consumable items. The quarter saw a solid growth in the categories of home products and apparel as well.


A comparison with the figures from a year ago, Dollar General (NYSE:DG)’s consumable sales improved by 8.3%, seasonal sales increased by 3.1%, home products sales upped by 7.5%, and apparel sales inclined for 6.9%. Furthermore, year to date, the company opened 426 and relocated 585 stores, which greatly contributed to their sales performance for the quarter.


Despite the company’s struggle brought about by tough competition in the market, Dollar General (NYSE:DG)’s net income saw a 2.4% increase ($251.3 million) this quarter, which is $0.83/diluted share if we were to match it with average analyst estimates. In addition, an improvement by 6% was seen in the U.S. dollar-store giant’s gross profit. This margin compression is attributed primarily to promotion markdowns coupled by the increase in low-margin consumable sales as mentioned earlier. A gross margin compression down from 31.3% from exactly a year ago to 30.8% was a result of the company’s spending on marketing activities for the promotion of their products to keep up with its competitors.


Dollar General (NYSE:DG) CEO Rick Dreiling correlated the market’s current macroeconomic status with the company’s expenditures for merchandise distribution and with the pressure received by clients in their consumption of products behavior. The management sees the decrease in customer consumption as a monumental dip, and therefore, refuses to surrender their bid in acquiring Family Dollar Stores (NYSE:FDO).


The company’s officials lowered their same-store sales guidance for the fiscal year ending January 2015. The same store-sales are predicted to increase from 3% to 3.5% for the fiscal year as opposed to the previous forecast from 3% to 4%. Dollar General (NYSE:DG)’s management remains optimistic in sealing the deal with Family Dollar (NYSE:FDO) and opted to maintain an 8% to 9% growth estimate for the entire year.


The company faces an uncertain direction as the stability of their future greatly depends on the Family Dollar (NYSE:FDO) deal. Dollar General (NYSE:DG)’s second quarter performance was short of satisfactory and unless an effective strategy is applied, their income is likely to see a drop as competition in the market is continuously becoming stiff in order to meet the demands of customers who are by every bit being made to practice frugality.

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