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One of the bevy of dollar stores, Dollar General (NYSE: DG), delivered second-quarter earnings on Thursday. The numbers weren’t bad, nor were they great. They were fine. They were good numbers. Investors have sold off the stock slightly, but it remains overpriced and probably should be sold at these levels.
Let’s look at the Dollar General earnings numbers and see how the business is doing.
Dollar General’s net income came in at $282 million, or 95 cents per share, compared to net income of $251 million, or 83 cents per share last year. That’s a very respectable growth rate of 12%.
Net sales increased 7.9% to $5.1 billion, up from $4.72 billion. This is also respectable, but we always want to look at same-store sales to determine how much organic growth the company actually saw.
Same-store sales increased 2.8%, and this came on increases in both customer traffic and average ticket. No category was left behind in these comps. The consumables segment had increases in candy, snacks, tobacco and perishables. The non-consumables segment was pushed higher by seasonal items, sundries, hardware and housewares.
Fumbling Along
In all, 2.8% in comps is OK. It’s not great. It’s not like the cover is being knocked off the ball here, but it isn’t awful. The categories where the company saw the most growth also tells you that the economy is still kind of fumbling along. Other companies that sell these same products at higher price points are also lagging, so even at the dollar stores, we are learning that the economy is definitely not growing robustly.
By the way, inventories increased 2.7%, which is dead-on a great number. We want inventories increasing at about the same rate as comps, so the company doesn’t have too much sitting on the shelves, or too little if business picks up.
Gross margins improved slightly, up 36 basis points to 31.2%. That’s a decent margin, but again, it’s only decent. Competitor Dollar Tree (NASDAQ: DLTR), pre-merger, sees gross margins around 40%.
Buying Back Shares
I definitely do not like that the Dollar General spent $200 million on share repurchases here. I think that’s a terrible use of capital because the stock is overpriced. With a run rate of $1.07 billion in net income, the company looks to earn about $3.30 per share in fiscal year 2015. Yet the stock trades at $74, or 22.5 times earnings on about 13%-14% net income growth.
That’s way too expensive. Dollar General should not be buying its stock and neither should you.
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