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Dollar General Corp. filed its latest quarterly report this week — and if you’re looking for a great example of how tax reform distorts perceptions about corporate earnings, this is it.

First, the important numbers. Dollar General reported first-quarter 2018 revenue of $6.1 billion, pretax income of $465 million, tax expense of $100.5 million, and net operating income of $364.8 million. Here is how it all looks in chart form, compared to first quarter of 2017.

Looks good at first glance, right?

Do a bit of math, however, and the picture becomes less rosy.

First, Dollar General’s effective tax rate (tax expense divided into income before taxes) dropped sharply: from 37.2 percent in 2017, to 21.6 percent this year. That’s no big surprise. Tax reform cut statutory corporate tax rates from 35 to 21 percent, and that’s almost the exact same cut we see for Dollar General.

But that means most of Dollar General’s growth in net income comes from that tax cut — not from growth in revenue and prudent cost management.

For example, if we taxed that $465.4 million in pre-tax income for 2018 at the same 37.2 effective rate from one year prior, Dollar General’s tax expense would have been $173.1 million, rather than the $100.5 million it actually paid. And therefore, net income would have been only $292.3 million rather than the $364.8 million above.

Now, that would still be growth in net income compared to the year-ago period. But growth would be only 4.5 percent, rather than the 30.5 percent we see here.

A few other numbers to consider: revenue grew 9 percent from Q1 2017 to Q1 2018 — but cost of goods sold kept pace with that, rising 8.7 percent; and Sales, General & Administrative rose 12 percent. (Hello, labor shortage and rising wages.) So growth in operating profit only rose 3.4 percent.

In other words, almost all Dollar General’s growth in profits for first quarter 2018 came from a tax cut, rather than from organic revenue growth and attention to cost management.

Is that the end of the world? No. But it’s like running a four-minute mile because you took a big shot of adrenaline just before the race, rather than through disciplined workouts and training.

Sooner or later, that adrenaline runs out. Financial analysts may want to ask CFOs on the next earnings call what the plan is after that happens.

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