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Dollar General expects pressure from tariffs, freight to continue in Q1, FY'19


Dollar General expects pressure from tariffs, freight to continue in Q1, FY'19

Dollar General Corp. executives said March 14 that they expect to face pressure on gross margins in the first quarter of fiscal 2019 from tariffs as well as headwinds from rising transportation costs, although they remained optimistic about a forecast double-digit growth in EPS despite fiscal fourth-quarter EPS results that missed analyst expectations.

Executive Vice President and CFO John Garratt told analysts on a call that the company factored in the current level of U.S. tariffs in its 2019 guidance but did not include additional tariffs in its forecast.

"Our guidance assumes that the government maintains current tariff levels and the guidance does not contemplate any increases in rates or any additional tariff enactment," Garratt said on a March 14 call with analysts discussing the company's fourth-quarter and fiscal 2018 results.

"We believe that the first quarter gross margin will be the most pressured on a year-over-year basis and that we will see improvements in the year-over-year comparison as the year progresses," Garratt said.

While the Dollar General CFO did not specify which tariffs the company is factoring into guidance, some retailers have factored in a 10% tariff imposed by the Trump administration on $200 billion of Chinese imports, as well as a threatened 25% tariff on the imports, into 2019 outlooks.

President Donald Trump and Chinese President Xi Jinping are expected to meet in late March or April to help seal a deal that negotiators have been working toward to end the tariff war. Trump has already extended a March 1 deadline for a deal although no new deadlines have been set. Trump previously threatened to increase the 10% tariff on $200 billion of Chinese goods to 25%.

Dollar General CEO and director Todd Vasos said "forward sourcing" continues to be a long-term margin opportunity, noting the company is focused on expanding the number of countries it sources from.

"We believe there are many countries around the world where we can source goods at [an] even greater value for our customers," Vasos said.

Soaring transportation costs are also expected to weigh on the company's gross margin in fiscal 2019.

"While we have seen some signs of stabilization in a more balanced marketplace, we anticipate that we could see continued transportation cost increases in 2019," Garratt said.

Although Dollar General reported earnings that fell below analysts' expectations, the company's executives doubled down on their goal of growing EPS by double digits.

Vasos said "our long-term goal generally remains to deliver double-digit adjusted EPS growth. To do this, we need to make smart business decisions that focus both on growing the top line and capturing incremental operating margin where and when we can."

Part of those business decisions include the company's investment in two new initiatives, DG Fresh — a supply chain initiative that will allow Dollar General to self-distribute perishable products — and Fast Track, an initiative expected to increase labor productivity by providing self-checkouts and an efficient sorting and stocking system.

Although both initiatives are expected to pressure Dollar General's selling, general and administrative rates in the near term, the company said it will benefit top and bottom lines in the long run.

The DG Fresh initiative, which was launched in early 2019, serves about 300 stores through one distribution center, and the company expects to have up to four centers servicing 5,000 stores by the end of fiscal 2019. A full rollout of the initiative is expected to take place over three to four years. The Fast Track initiative will be piloted in select stores and distribution centers in 2019, but there is no plan for a full rollout yet, the company said.

"[DG Fresh] will be a significant margin driver as we move into 2020 and beyond, and that's really driven primarily off of the distributor cost that we pay today, which has a substantial upcharge attached to it," Vasos said. "On the top line, I think it will be a meaningful top-line contributor as well, as we continue to be better in stock because we know how to distribute goods."

Dollar General also announced plans to launch private label brands in cosmetic and baby products categories in 2019.

"Across private brand, we continue to believe we can increase sales and penetration, which could have a meaningful impact on both gross margin and sales growth over the long term," Vasos said.