Dollar General (DG, Financial) is trading at new all-time highs. In fact, since the company launched its IPO, it has been an outstanding performer on the stock market, and has appreciated more than 300%. The key factor behind this stupendous rally is its strong fundamentals and year on year growth in its financials. The same was displayed in its recent results, with net sales increasing 7.8%, while earnings rose 9.7% on a year over year basis. During the quarter, its strongest category was Consumables, which got its boost from strong sales of tobacco products, perishables, candy and snacks.
What next?
The company hoped to propel this growth even more with the acquisition of Family Dollar. However, there were many regulatory hurdles in the path forcing Dollar General out of this deal. The company had initially proposed an all-cash $9.1 billion bid to buy Family Dollar and was ready to divest up to 1500 stores. But the advisory firms involved in this deal were not pleased with this offer as they expected the company to shed more stores.
On the other hand, Dollar Tree made an $8.5 billion bid in cash and stock and was willing to shed as many stores as required to pass the antitrust issues. As both the offers were on table, shareholders decided to go with Dollar Tree, which will make it the largest discount retailer in the U.S. Consequently, Dollar general will have to put in more effort to compete with this giant apart from its existing rivals.
However, if we consider its past records we can be sure that Dollar General will not be weighed down by this lose and will find alternatives to compensate for it. The company continued its strong performance during the quarter and took advantage of the improving retail statistics, with exclusive holiday offers across gifts, toys, electronics, clothing, and additional categories for every holiday need. Indeed the numbers are improving on papers with growth in the economy, but affordability is still a big concern for a middle income consumer, which in fact is Dollar General’s target customer base.
Moreover, the company's returns on the lifecycle remodels are over 200 basis points higher than full remodels. As a result, it is planning to aggressively expand its lifecycle remodel program in 2015. For the entire year, Dollar General plans to open 730 new stores and remodel 875 stores with the priority on lifecycle remodel. With these new store openings the company will expand its footprint in three new states that will ultimately translate in strengthening its top line.
Conclusion
Going forward, Dollar General has significant moves under its sleeve, which will continue to drive its present momentum. The numbers also suggest the same with a forward P/E of 18.05 compared to a trailing P/E of 21.6. Moreover, its splendid stock rally also confirms its positives with higher prospects in the coming years. In the light of these facts Dollar General seems to be a good investment option.
