Dollar General Q1 Earnings to Show Costs of New Initiatives

While the market initially reacted negatively to Dollar General's (NYSE: DG) fourth-quarter earnings report earlier this year because guidance was less than what analysts had forecast, investors realized the deep-discount retailer was taking a hit because it was actually investing in its business to grow overall sales, maintain a 29-year consecutive string of higher comparable store sales, and expand earnings.

Sometimes, though, achieving its goals will require taking one step back before moving two steps forward, and 2019 is probably going to be like that. With that in mind, let's take a look at what investors might expect from Dollar General's first-quarter earnings report on May 29.

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Front-weighted investments

Dollar General is using this year to make investments, pointing to five broad areas where they would occur, including:

  • Bringing its supply chain in-house.
  • Adding more fresh food to more stores.
  • Installing new self-checkout lanes.
  • Launching a "buy online, pick up in-store" service.
  • Introducing more private-label goods.

It is spending $50 million this year to support these programs, but the bulk of the money will be spent on just two of them: DG Fresh, which will allow Dollar General to self-distribute fresh and frozen produce to its stores, and Fast Track, which is the new self-checkout initiative. However, both will serve as a headwind to the retailer's sales, general, and administrative expenses line item, so while its goal is always to deliver double-digit earnings-per-share growth, some years that won't happen.

Dollar General expects gross margins to be under pressure most in the first quarter, but then it also wasn't expecting the tariff situation to change, so its guidance assumed the government would maintain tariffs at their then-current levels. As we now know, talks between the U.S. and China broke down and the Trump administration raised tariffs on $200 billion worth of Chinese exports, hiking the duties from 10% to 25%. In response, China is raising the tariffs on $60 billion worth of U.S. goods beginning June 1.

Without saying exactly how much it imports from China, Dollar General notes it's a "substantial" amount and in its annual report said additional tariff hikes "may have a more significant impact on our business and on our customers' budgets." That looks like it will be the case.

The various initiatives Dollar General is undertaking may help mitigate some of the costs the company will end up being exposed to. Bringing its supply chain in house, for example, should save it money and allow it to expand operating margins. That's not going to happen until next year, though, so investors should understand the first half of 2019 -- and in particular the first quarter -- will likely look comparatively weak from a profits standpoint.

Payoff later on

There's no reason not to expect Dollar General to deliver on its other targets, and the value proposition of the deep discounter's offerings should still continue to drive more customer traffic and higher comparable sales growth.

By investing in technological improvements, whether it's the self-checkout lanes or its DG GO! mobile app that lets shoppers scan-and-go as they pick up items, Dollar General is enhancing the customer experience at its stores.

Those moves also improve its bottom line, as CEO Todd Vasos told analysts last quarter, "We know that our customers who more frequently engage with our digital tools tend to shop with us more often and check out with larger average baskets. In fact, their baskets, on average, are about twice as large as those of nondigitally engaged shoppers."

Management doesn't provide quarterly guidance, but Wall Street is forecasting earnings of $1.39 per share, up $0.03 or 2% higher than last year, with revenue up 8% year over year.

The next few years will be where Dollar General is investing in itself. There should be payoffs down the road for investors when the investments come to fruition, but that means bearing the costs upfront, which may make quarters like this upcoming first one more muted than those down the road.

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Rich Duprey has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.