Dollar General hikes outlook after strong Q2

Sales gains, expense leverage combine to lift profits 47%; back-to-school spending strong so far

Dollar General on Wednesday reported second-quarter profits of $214 million, an increase of 47 percent from a year ago. Per diluted share, the company earned 69 cents after adjustments, which was 5 cents better than what analysts had expected.

Sales at the Goodlettsville-based retail giant climbed more than 10 percent during the quarter to $3.95 billion. On a same-store basis — a metric that had some market watchers concerned in recent weeks — growth was 5.1 percent. The company's gross margins dipped a bit, but improvements in administrative and interest expenses as a share of revenues lifted net margins by more than 130 basis points.

"We are pleased with the start of our third quarter and have refined our expectation for full year same-store sales growth to 4 to 5 percent, an increase from our previous expectation of 3 to 5 percent," said Chairman and CEO Rick Dreiling in the company's release. "In addition, we are raising our full year adjusted earnings per share guidance to a range of $2.77 to $2.85, including a $0.04 per share benefit from the settlement of an income tax audit in the second quarter, from our previous guidance of $2.68 to $2.78."

Dollar General also said its board last week authorized a $500 million share buyback program that will pick up where its last $500 million plan — authorized just last December — left off. It's possible some of the newly authorized $500 million will go toward further lowering the stakes of Kohlberg Kravis Roberts and Goldman Sachs, which have been steadily trimming their Dollar General holdings since taking the company public again almost three years ago.

On his team's conference call with analysts, Dreiling said Dollar General is moving forward on a number of initiatives:

• The expansion into California is on track to give the company a 50-store network there by the end of the year. More than 20 of the locations opened so far are the company's newer Market and Plus formats.

• A push launched a year ago to sell more $1 items is producing solid sales gains.

• An initiative that tweaks product lineups to take better account of the demographics surrounding individual stores has been rolled out to about 570 stores and is producing good results.

• Back-to-school spending has been strong, with sales in that category climbing in the high single digits. Dreiling said that spending last year was more focused on the essentials. "This year, they’re breaking down and buying the backpack and the things that hang on the backpack," he said.

At about 12:15 Central, shares of Dollar General (Ticker: DG) were up 1.5 percent on the day to $41.51. Year to date, they're up 25 percent.

SEE ALSO: Jim Cramer's quick take on the company's numbers and the retail environment