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Small Bucks Make Big Profit for Giant Retailer

February 17, 2014 | About:

Dollar General Corporation (DG) is one of the largest discount retailers in the U.S. The company offers a selection of merchandise that includes consumables, seasonal, home products, and apparel, through a chain of over 11,000 stores in 40 states. Consumables is its main category, accounting for 77% of total revenues in third quarter 2013. This defensive retailer offers everyday low prices (typically $10 or less) to low-end consumers in small-format stores. Its merchandise includes high-quality national labels and private brand selections of a comparable quality at considerably meager prices. DG buys merchandise directly from many producers of national trademarks like Procter & Gamble Co. (PG), Kimberly Clark Co. (KMB), Unilever NV (UN), Coca Cola Company (KO) and PepsiCo Inc. (PEP). And its locations are supplied from 11 distribution centers strategically placed along its footprint.

An Ever-Growing Business

DG caters to a huge customer base through its $10-or-less pricing scheme. The strategic location of its stores and the easy checkout experience they offer are also key differentiators that large-box stores can`t easily replicate. Hence, the company looks forward to gaining more market share by continuously opening new locations. This strategy will also allow the firm to remain competitive by keeping pace with Wal-Mart (WMT)`s roll out of its new Express stores.

In fact, DG estimates that the market can support 14,000 new stores and is thereby driving an aggressive expansion plan that resulted in 577 new outlets and the remodeling or relocation of 534 stores during the first nine months of 2013. Furthermore, the firm expects to inaugurate around 700 locations and remodel or relocate about 525 outlets during fiscal 2014.

A Headwinds-Proof Trajectory

Dollar General Corporation has kept its business afloat, and growing, even in tough macroeconomic environments. Its comparable store sales have been increasing for 24 consecutive years until 2013. And guidance for fiscal 2014 expects an increase in comps of 4%% to 4.5%. The long-term success the firm enjoys augmented in the last few years with customers’ increase in the use of the Supplemental Nutrition Assistance Program, which raised from about 26 million people in 2008 to 47 million in 2012. In the same period, DG`s comparable same store sales increased from 2% to an average of more than 7%. Recent government spending cuts to this program are therefore expected to hit on near-term results.

An Active Management

DG`s sustainable growth, however, is being empowered by a variety of initiatives that focus mainly on better price management, efficient inventory administration, shrink improvement, global sourcing and distribution efficiencies. Along these lines, the enlargement of its store base will give the company purchasing scale and the opportunity to upgrade its distribution expenses. Supplying stores with an accurate inventory level and avoiding trips with half-empty trucks will make the perfect balance to cut transport costs and improve inventory turns. A higher private label penetration and the low costs of small-store opening will also benefit the company allowing from mid- to high-single-digit growth rates over the next decade.

A Sturdy Investment

Dollar General Corporation has trajectory of strong sustained growth and is actively working to increase its margins by investing in infrastructure and improving its costs management. Moreover, the company is returning much of its free cash to shareholders through stock repurchases. DG`s stocks trade at 18.30 its trailing earning compared to the industry average of 18.80 and its return on equity showcase a robust 19.10 compared to its competitors’ 9.80 average. Also, its earnings per share increased from 1.82 in Jan 2011 to 2.85 in Jan 2014. Investment guru Daniel Loeb (Trades, Portfolio) recently increased his holdings by 12.5%, following my bullish feeling about DG’s great growth opportunities.

Disclosure: Vanina Egea holds no position in any stocks mentioned.

About the author:

Vanina Egea
A fundamental analyst at Lone Tree Analytics

Visit Vanina Egea's Website


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