Margin Pressure & SNAP Cut Woes Curb Dollar General's Gain

Dollar General CorporationDG remains committed toward better price management, merchandise initiatives and cost containment. The company's strategic endeavors have helped it to deliver better-than-expected numbers for the third straight quarter, as it posted second-quarter fiscal 2017 results. Despite robust results, its shares have gained only 5.4%. However, the stock has outperformed the industry which has witnessed a decline of 3.2%. Let's delve deeper and find out what is hindering Dollar General's growth.

Gross Margin Woes Taking a Toll

Gross margin, an important financial metric, that gives an indication about the company's health, has shown constant deceleration in the past four quarters. In the second quarter, gross margin contracted 47 basis points (bps) to 30.7%, following a decline of 34 bps to 30.3% in the preceding quarter due to higher markdowns and promotional activities along with a higher percentage of sales of consumables, which generally have lower margins in comparison with non-consumables. In the fourth and third quarters of fiscal 2016, gross margin contracted 20 bps and 30 bps to 31.6% and 29.8%, respectively.

Proposed Cut in SNAP Benefit a Major Obstacle

Reduction in Supplemental Nutrition Assistance Program (SNAP) benefit has been haunting Dollar General for a long time and if President Trump's proposed food stamp cut get passed, the situation could be worse. Trump suggests on reducing food stamps program by $193 billion, which is approximately 25% of the budget for the program. Cut in SNAP benefit will hamper the company's performance as people with low income will have less money to spend and could restrict spending to low margin products. It has also stated that cut in SNAP program has impacted 56% of store base. However, the company stated that the impact of both price and SNAP benefits reduction has moderated in the second quarter.


Despite the above mentioned circumstances, the Zacks Rank #3 (Hold) company has kept it afloat in a competitive environment. Dollar General's comparable-store sales growth story is impressive. Fiscal 2016 was the 27th consecutive year of comparable-store sales growth for the company. The company's upbeat second-quarter fiscal 2017 performance and buyout of 285 Acquired Stores prompted management to raise earnings outlook. It now anticipates earnings in the band of $4.35-$4.50 per share, up from the earlier estimate of $4.25-$4.50.

3 Retail Stocks Hogging the Limelight

Top-ranked stocks, which warrant a look in the retail sector includes, Big Lots, Inc. BIG , The Gap, Inc. GPS and Burlington Stores, Inc. BURL . All these stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .

Big Lots has an impressive long-term earnings growth rate of 13.5%.

The Gap delivered an average positive earnings surprise of 9.3% in the trailing four quarters and has a long-term earnings growth rate of 8%.

Burlington Stores delivered an average positive earnings surprise of 17.7 in the trailing three quarters and has a long-term earnings growth rate of 16.2%.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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