Dollar General Strategising To Take The Retail Sector By A Storm

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Mar 15, 2015

Dollar General (DG, Financial) is optimistic about its growth plans in 2015 even after a failed bid to acquire Family Dollar (FDO, Financial) with a rejected $9 billion takeover bid. One of America’s top discount retailers, Dollar General has stated their plans to open over 730 new stores in 2015 that will represent a 6% growth.

A merger between its two largest rivals, Family Dollar and Dollar Tree (DLTR, Financial), has knocked Dollar General off the top spot of being America’s largest discount retailer. The company has plans to increase store size square footage by 7% next year. Last year, Dollar General was responsible for opening up 700 stores across North America.

The company had earlier speculated earnings between $3.85 and $3.95 per share for the financial year ending Jan 31, 2016. Dollar General’s business model works on selling items for less than $10 and is bullish about 2015, forecasting a year of strong sales growth. Company shares were up 20% over the previous 12 months and reached $73.15 in premarket trading.

Plans going forward

Dollar General gained a lot from the Great Recession as Wal-Mart’s (WMT, Financial) loyal customer base shopped at Dollar General to save money for gas. By the start of 2015, Dollar General had 11,789 stores across North America as opposed to 8,877 stores in 2010.

Chief Financial Officer David Tehle is about to retire on July 1st. Dollar General has also initiated a $1 billion plan of repurchasing shares.

The Tennessee-based discount retailer has plans to spend between $500 million and $550 million this year to open over 730 new outlets as well as revamp and redesign 915 pre-existing stores.

Rick Drelling, Dollar General’s CEO and chairman, said “Given our strong return profile for new stores, we plan to accelerate our new store openings to approximately 7% square footage growths in 2016”.

According to the discount retailing business, full year total sales are expected to grow between 8 to 9% in 2015 which would mean a sales figure of $20.42 billion to $20.61 billion being reached. 3 to 3.5% growth is being estimated for same-store sales.

According to Thomson Reuters, analysts are predicting revenue of $20.54 billion. As percentage of sales, Dollar General’s gross profit was 31.7% in the fourth quarter – down a full 23 points. This was influenced by increased sales of lower margin products such as tobacco and perishable goods. According to Dollar General a now-resolved labour dispute at American ports on the West Coast had led to a slowdown of its higher priced inventory, with an estimated $8.5 million negative impact on the company’s profits in the fourth quarter and lead to lower initial markups.

Management Speaks

Discount General’s CEO Richard Drelling states that all their full-time employees make more than the federal minimum wage of $7.25 per hour and that 12% of their part-time employees are also paid in the same wage bracket. After spending five months on the job, the employees can get promoted to the $9 per hour bracket, competing directly with Wal-Mart’s workers whose salaries will also hit $9 per hour shortly.

“In terms of what we’re paying, we feel pretty comfortable,” Mr Drelling said. ‘We’re going to continue to monitor the landscape and we’ll assess or make any adjustments that we need to make.”

Analysis

It is fairly easy to stay bullish on Dollar General who are synching a lot of money into revamping and redesigning existing stores while not being able to raise their profit margins. Their workers are happy and their labour disputes have been sorted out which means a positive boost for their productivity. Analysts are placing a ‘buy’ rating on the company and project earnings of $1.17 a share with revenue hitting $4.94 billion.