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Hurricane damage, freight costs weigh on Dollar General's earnings, execs say

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Hurricane damage, freight costs weigh on Dollar General's earnings, execs say

Lingering impacts from hurricanes Florence and Michael will drag on Dollar General's fiscal fourth-quarter earnings, while the retailer expects longer-term headwinds from increased shipping and transportation costs, executives said Dec. 4.

"You look at our footprint, we're particularly dense in coastal Carolinas and coastal Florida as well as in rural areas where a lot of the heaviest damage was," Dollar General CEO and director Todd Vasos said during a conference call discussing the discount retailer's third-quarter earnings.

The costs associated with the damage hit Dollar General's fiscal third-quarter diluted EPS and caused the company to trim its fiscal 2018 earnings guidance, which sent the company's stock tumbling by 8.3% in midday trading Dec. 4 to $102.42 per share.

Florence made landfall on the North Carolina coast Sept. 14, tearing a path of death and destruction across both North Carolina and South Carolina. Michael hit nearly a month later on Oct. 10 and hit much of the Southeastern U.S.

"As you look at the nature of the cost, it was storm damage and repairs [and] inventory damage [that] were the key drivers there," Vasos said during the call.

Combined with other floods and fires, Dollar General booked $19.9 million in expenses for the quarter from the hurricanes. Those charges and other costs will deliver a 4-cent hit to diluted EPS in the fourth fiscal quarter, Executive Vice President and CFO John Garratt said.

Longer term, Dollar General is expecting transportation costs, particularly higher carrier rates, to pressure gross margins in the company's fiscal fourth quarter and fiscal 2019, executives said.

A shortage of truck drivers in the U.S. is forcing companies to pay more for freight or to look for alternatives to offset the increased costs. Gross profit for Dollar General dropped 39 basis points year over year in the third fiscal quarter to 29.5% of sales, Garratt said.

The company is growing its private fleet of trucks to 200 by the end of fiscal 2018, up from 80 at the end of fiscal 2017, and expanding its distribution center network to better offset increased shipping costs, executives said.

"It's hard to say how long the carrier rates pressure will continue, but we feel [we] are very well-positioned with the mitigating actions that we're taking as that stabilizes," Garratt said during the call.

Regarding trade, Garratt said the company has had "a relatively low exposure" to tariffs imposed by the Trump administration thus far. However, in preparation for a possible increase in tariffs, the company is contemplating options such as reducing its dependency on China by diversifying product manufacturing and supply. Presidents Donald Trump and Xi Jinping agreed to a 90-day truce to negotiate trade policies, after a meeting at the G-20 Summit in Buenos Aires, Argentina, on Dec. 1. The Trump administration imposed 10% tariffs on $200 billion worth of Chinese imports effective Sept. 24, which was expected to increase to 25% on Jan. 1, 2019. However, the new agreement will put the previously expected increase on hold, while both countries negotiate new policies.

Dollar General also announced plans to continue its investments in real estate expansion in 2019. The new projects include opening 975 new store openings, remodeling 1,000 stores and relocating 100 stores. While Dollar General has historically focused on rural areas, Vasos said the company is positioning itself to open more store in urban areas in the future.

"It won't be a radical change, it will be a slow methodical change to a little bit more of a heavier metro mix as we continue to build the portfolio out," Vasos said.

On the digital front, the company’s DG GO app, which launched earlier this year, is now live in 250 stores, Vasos said. The app allows customers to apply coupons to products and skip the checkout line by paying on their phones and had more than 20,000 actively monthly users in the third quarter.

Although Vasos did not give specifics on possibly integrating the app into more stores, he said the app has received positive feedback from customers.

"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," Vasos said.