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Dollar General: Buy This Industry Leader to Profit from Weak Consumer Spending

May 27, 2014 | About:
jaggom

jaggom

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Dollar General (DG) reported solid results in the recent quarter, as a result of which its stock prices soared. Consequently, the company raised the lower end of its full-year guidance. In addition, Dollar General delivered value to its share holders with a share repurchase program of around $1 billion. All these factors have made Dollar General the best-performing dollar store stock as compared to peers such as Dollar Tree and Family Dollar.

A Solid Performance

Dollar General’s solid performance came as a surprise to the Street, especially after Dollar Tree reported lukewarm results last month. Dollar Tree had missed earnings estimates and issued a weak outlook. It cited cautious spending and flagging consumer confidence as the reasons for its weak results, which triggered weakness at other dollar store chains as well.

However, these factors should ideally be tapped by dollar stores for generating more business since they offer merchandise at discounted prices. And Dollar General used this opportunity to capitalize on these issues. Its sales increased 10.5% while net income grew 14% from the year-ago period. According to Kantar Retail survey, Dollar General “is the least expensive place to shop,” which further increased its store traffic. Same-store sales were up 4.4% from the year-ago period as Dollar General’s strategy of selling tobacco in its stores worked well.

In fact, Dollar General’s same-store sale growth was better than both Dollar Tree and Family Dollar. Considering that Dollar General is the largest dollar store chain, it is impressive to see that the company is still growing at a fast pace.

Ready to Go Higher

At the current pace of growth, it seems that Dollar General’s stock price will go higher. The company has optimized its store space to increase productivity, which led its market share to increase in consumable items. Once again, tobacco sales boosted its numbers. According to management, two-thirds of customers who buy tobacco at a Dollar General store combine their purchase with one or more items.

Installation of coolers at its stores was yet another factor which helped increase sales of consumable goods by around 12%. The company had remodeled its store to push the sales numbers higher.

Also, Dollar General’s aggressive installation of coolers in its stores sent sales of consumable goods up by 12%. The company has been remodeling its stores in a way that it can push sales of consumables higher. Its Dollar General Plus format carries wider aisles and bigger coolers, and this should help it maintain the solid same-store sale growth momentum that it has gained of late.

Expansion Moves

The company sees bigger opportunity to expand its stores. Earlier, management anticipated around 10,000 stores in the U.S., while now they are expecting a possibility of 14,000 stores. Currently, it has more than 11,000 open stores and expects to increase its store base by around 27%. In fact, the company has plans to open around 700 new stores in fiscal 2014, which is more than its last year’s target of 650 stores. In addition, 525 stores will be remodeled as Dollar General updates them for better productivity.

Better Than the Rest

Considering its present growth strategies, Dollar General may position itself as the most dominant dollar store. Since it has to face cut-throat competition from its peers, a wide store network and lower prices could help Dollar General increase its lead over both Dollar Tree and Family Dollar.

According to Kantar, Dollar General’s average basket price of $28.70 was the lowest, while Family Dollar came third in the survey, with an average basket price of $30.81. Thus, Family Dollar is around 7.4% costlier than Dollar General, which could be one of the probable reasons for lower store traffic at Family Dollar. Its same-store sales remained flat in the previous quarter, and the company expects it to decline further.

Family Dollar has slumped around 6.6% from last year. The company has been sailing through troubled waters and it seems that Family Dollar’s strategy of selling tobacco products and more consumable items isn’t turning out to be as successful as Dollar General’s.

It is clearly seen from these facts that Dollar General has dominated in the discount retail industry as compared to its peers. Its overall low prices have helped it outperform Dollar Tree, which with 4,800-plus stores, is the smallest dollar chain.

Dollar Tree also saw a decline in its same store sales. It reported a comps growth of around 3.1% in the previous quarter and this figure might further slow down to 2.4% in the ongoing quarter. Thus, Dollar General is keeping competition at bay successfully and its strategies could make it more dominant.

Conclusion

Dollar General seems to have more upside. The stock isn’t too expensive at 20 times earnings, especially when the slower growing Dollar Tree trades at a similar multiple. It offers fairly low prices and its valuation is decent. It has a wide store network, and has an aggressive expansion and remodeling plan in place. Considering all these factors Dollar General seems to be a good investment option.


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