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Is This Discount Retailer A Solid Buy?

June 24, 2014 | About:
Suravi Thacker

Suravi Thacker

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Discount retailers are very much in vogue because of its low price strategy which has convinced cost conscious customers. Therefore, these retailers have done really well since the recession. One of the leading discount retail companies is Dollar General (DG) which has been an exemplary performer.

It released its first quarter results recently which, although did not meet the analysts’ estimates, delighted its investors making the share prices move north. Let us explore further.

The quarter in gist

Driven by higher demand for consumables, revenue climbed 7% to $4.52 billion. However, this was below the analysts’ expectation of $4.56 billion. One of the key drivers of top line growth was new store openings. The retailer added 214 new stores to its portfolio, which helped in sales growth. However, it was not only the new outlets, but also sales at existing stores which drove sales higher. Same store sales grew 1.5% during the quarter and were driven by higher store traffic and increased number of transactions.

Consumables segment, the largest segment, was one of the bright spots which witnessed a sales increase of 7.8%, registering $3.45 billion in revenue. This increase in sales was driven by sale of candy, perishable products and tobacco. Addition of tobacco to Dollar General’s portfolio has been instrumental in its growth. People who visit the store to buy tobacco also buy other products, resulting in higher sales.

Other segments also registered growth. For instance, revenue from home products rose 6.7% and that of seasonal category grew 2.3%. Also, sales from the Apparel segment climbed 3.2% to $251.6 million.

The company’s earnings also increased to $0.72 per share from $0.67 per share. But it missed the estimates by a penny. One point of concern for the retailer has been its gross margin, which shrank by 57 basis points. This was due to more of low margin products sold, such as tobacco. Although these products are driving sales higher, it is leading to lower margins. Moreover, huge discounts and promotions to attract customers resulted in lower margins.

Key strength

Dollar General has been able to perform remarkably well in the last few years, mainly because of its strategy of offering products for $1 to $5. This lures budget constrained customers to its stores. On the other hand, big box retailers such as Wal-Mart (WMT) provide everyday low prices. Wal-Mart was unable to compete with such discount retailers. However, it has also resorted to smaller format stores which are located in the urban areas and are easy to access. These Express stores weigh less on the cost structure also.

Coming back to Dollar General, the company plans to focus on higher margin products since its margins have been shrinking. This should help the retailer boost its bottom line too. Also, it plans to open a total of 700 new stores in fiscal 2014 and remodel 500 outlets in order to enhance its top line.

Final words

In addition to a great quarter and some key strength in its kitty, Dollar General’s guidance made investors happy. It reaffirmed its outlook for the year and declared that it would continue with its expansion plans. The company expects sales to increase by 8% to 9% and comparable sales to grow between 3% and 4%. With a great quarter, bright outlook and expansion plans, Dollar General looks good to go.


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