Dollar General shares slide as profit impacted by increased product costs

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Dollar General (NYSE:DG) shares plunged Thursday after the company reported third-quarter earnings before the open, missing earnings estimates.

The discount retail company’s earnings per share came in at $2.33, $0.21 worse than the analyst estimate of $2.54, while revenue topped the consensus estimates at $9.5 billion versus the consensus estimate of $9.42B.

Dollar General shares are down more than 8% at the time of writing.

Net sales increased by 11.1%, while same-store sales grew 6.8% during the quarter, while the company said there was a “modest increase” in customer traffic. Dollar General also faced higher product costs.

In addition, Dollar General said during the third quarter, it experienced delays in acquiring additional temporary warehouse space sufficient for its inventory needs, which caused inefficiencies within its internal supply chain, resulting in higher-than-anticipated supply chain costs.

“Despite the cost pressures we experienced during the quarter, as well as challenges within our internal supply chain resulting in higher-than-anticipated distribution and transportation costs, our team was resilient and worked hard to deliver double-digit diluted EPS growth. We believe the majority of these and other gross margin pressures are largely temporary, and we are confident in our plans to drive greater supply chain efficiencies moving forward,” said Jeff Owen, Dollar General’s chief executive officer.

Looking ahead, Dollar General sees fourth-quarter same-store sales growth of approximately 6% to 7% and earnings of between $3.15 and $3.30 per share. For the full year, it expects net sales growth of roughly 11%.

Following the release, BMO Capital Markets said gross margin pressures caught up with the company.

“DG reported a rare EPS miss on weaker-than-expected GM% pressure, despite comps slightly ahead of plan, resulting in updated FY23 EPS guidance 5-6% below prior plan,” BMO said, maintaining a Market Perform rating and $265 price target on the stock.

KeyBanc Capital Markets stated: “DG reported 3Q EPS below expectations due to unexpected supply chain inefficiencies. Encouragingly, comps increased 6.8%, aligning with our proprietary KFL data, as DG is seeing healthy spending trends, sequential improvement, and upside vs. Street estimates.”

“Looking ahead, the company anticipates continued gross margin headwinds to continue due to supply chain inefficiencies, unfavorable mix, and shrink. As such, DG lowered EPS guidance (below consensus), but reiterated 2022 sales guidance (above the Street).”