Dollar General cuts forecast on hurricane costs, warns of tariff hit

(Reuters) - Dollar General Corp DG.N cut its full-year profit and sales forecasts on Tuesday and warned that proposed tariffs on Chinese imports could begin to have a greater impact on its business and customers, sending its shares down as much as 8.6 percent.

FILE PHOTO: A sign is seen outside a Dollar General store in Chicago, Illinois, U.S. May 23, 2016. REUTERS/Jim Young/File Photo

The company topped profit estimates for the third quarter when excluding a 5-cent per share impact from hurricanes Florence and Michael, but said the fallout would reduce its holiday-quarter profit by 4 cents.

Dollar General has a large number of stores in the eastern and southern coastal areas damaged by the storms, but did not say how many stores were affected.

One of America’s biggest discount chains, the company warned that if Washington followed through on threats to raise tariffs to 25 percent, it was likely to hurt more.

The company directly imports about 5 percent to 6 percent of its merchandise, a substantial amount of which still comes from China, and said that many vendors also have supply deals in the country, making the entire supply chain vulnerable to higher tariffs.

Dollar General said it was working with vendors to reduce costs and considering other options to ease the blow from tariffs, including shifting manufacturing to other countries or stocking substitute products that are not subject to tariffs.

Few U.S. retailers have made much of the trade war so far, playing down the impact on their bottom lines, but with the U.S. economy showing signs of slowing, it would add to a growing list of headaches.

Like several other retailers, Dollar General also flagged higher freight costs, as a shortage of truck drivers, new driver regulations and higher fuel prices made moving freight much costlier.

The company cut its full-year profit forecast to $5.85 to $6.05 per share from the prior forecast of $5.95 to $6.15 per share, falling well below analysts’ average estimate of $6.11, according to IBES data from Refinitiv.

Investors were also worried about the company’s flat store traffic in the third quarter and pressures on its gross margins, which fell 39 basis points to 29.5 percent, primarily due to the direct and indirect impact of tariffs and higher freight costs.

Still, the company stuck to its aggressive investment plans to remodel and open new stores.

“While we expect gross margin pressure to continue through FY20, we expect 2019 initiatives to penetrate urban areas, expand key non-consumables and strengthen health and beauty offerings to drive future momentum,” CFRA analyst Camilla Yanushevsky wrote in a note.

The disappointing forecast and gross margin pressure overshadowed better-than-expected quarterly same-store sales, which rose 2.8 percent for the quarter ended Nov. 2, topping the 2.43 percent increase forecast by analysts.

Shares of the company, which have risen 20 percent this year, fell 8.5 percent to $102.22 in afternoon trading.

Net income rose to $334.14 million, or $1.26 per share, from $252.53 million, or 93 cents per share, a year earlier.

Net sales rose 8.7 percent to $6.42 billion, beating analysts’ estimate of $6.38 billion.

Reporting by Soundarya J and Ishita Chigilli Palli in Bengaluru; editing by Patrick Graham and Saumyadeb Chakrabarty