Investors had modest expectations heading into Dollar General‘s ( DG 3.46% ) fourth-quarter earnings release. The value-focused retailer’s sales trends have been negative in late 2021 after soaring in 2020. And price increases haven’t been enough to fully offset surging costs.
Those big-picture trends carried through into early 2022, according to this week’s report. But Dollar General is optimistic about a return to steady growth, likely around the second half of the year.
Let’s take a closer look.
Image source: Getty Images.
Sales trends were weak in the holiday selling period that ended in late January. Comparable-store sales fell 1% after declining by about the same amount in Q3. That result pushed revenue for the full year down 2.8%, near the bottom of the outlook that management issued back in early December.
That forecast didn’t incorporate a few major developments that hurt the industry, though, including soaring inflation and the rise of the omicron variant. Dollar General’s growth also looks better when you zoom out a bit, with two-year sales trends up 14% in 2021.
Management said that the two-year sales trend is encouraging, given all the pressure on retailing supply chains. CEO Todd Vasos said in a press release, “Despite a more challenging…operating environment, our teams remained focused on executing our operating priorities.”
That tough operating environment was clear from Dollar General’s financial performance. The chain paid higher prices for its products, shelled out more for transportation and distribution, and was pinched by a shift toward lower-margin merchandise as shoppers became more focused on price.
The retailer boosted prices in response, but not by enough to fully offset those negative cost trends. Gross profit margin fell to 31.2% of sales from 32.5% a year ago. Operating profit fell to $800 million, or 9.2% of sales, from $872 million, or 10.4% of sales in late 2020.
There was plenty of good news in management’s official 2022 outlook. The chain is predicting that comps will be slightly negative for a third straight quarter in Q1 before rebounding through the rest of the year. That period will be pressured by the fact that federal stimulus payments, which lifted results a year earlier, aren’t being repeated in 2022.
Overall, revenue should rise by about 2.5% compared to last year’s 2.8% decrease. Profitability in 2022 is likely to decline slightly even as earnings continue rising. “We feel very good about the underlying strength of the business,” Vasos said.
Management cited several growth initiatives, like the launch of its fresh products category and new store launches, that are helping differentiate Dollar General from competitors in the discount retailing space.
Sure, sales are declining slightly after spiking in 2020 and early 2021. But the retailer has a clear path toward a return to growth and rising profitability, likely by mid-2022. Those are the main trends to watch for indications of Dollar General’s attractiveness as a stock buy.
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