(Dollar General, Annual Filing)
Dollar General (DG, Financial) reported its second-quarter earnings last Thursday. The discount store retailer reported a 5.8% sales growth to $5.39 billion and 8.56% profit growth to $306.5 million year on year. As a result, Dollar General's share price dropped by 17.6% at market close.
Obviously, the market did not appreciate the retailer’s mid- to high single digit growth figures. As pointed out in Fortune, Dollar General failed to meet analysts’ expectations in terms of delivering good comparable sales numbers and said that its stores had fewer shoppers.
Comparable store sales refer to the amount of revenue a retail location generated in the most recent accounting period, relative to the amount of revenue it generated in a similar period in the past.
(Read more: Comparable Store Sales Definition | Investopedia)
Dollar General defined its same-store sales growth number as follows: "Same-store sales are calculated based upon stores that were open at least 13 full fiscal months and remain open at the end of the reporting period. We (Dollar General) include stores that have been remodeled, expanded or relocated in our same-store sales calculation. When applicable, we (Dollar General) exclude the sales in the noncomparable week of a 53-week year from the same-store sales calculation."
(Dollar General Same-Store Sales Growth, Annual and Quarterly Filings)
Specifically, Dollar General delivered a 0.7% same-store sales growth in contrast to 2.6% growth the analysts were expecting. Todd Vasos, Dollar General’s chief executive officer, had this to say:
“Although our same-store sales performance fell short of our expectations. Retail food deflation and a reduction in both SNAP participation rates and benefit levels, coupled with unseasonably mild spring weather.”
(Supplemental Nurtrition Assitance Program Enrollees, Fortune)
As indicated in the Fortune article, Americans who were relying once on SNAP are on a decline since its peak (47.5 million Americans) enrollment in 2012. In addition, an estimate of 500,000 would be reduced from the total SNAP enrollees this year.
SNAP stands for Supplemental Nutrition Assistance Program. SNAP offers nutrition assistance to millions of eligible, low-income individuals and families and provides economic benefits to communities. To be eligible for the program, households may have $2,250 in countable resources, such as a bank account, among other requirements.
In the first quarter of this year wages were reportedly climbing, but in this recent Advisor Perspectives report it was indicated that the wage growth had flattened as of July.
(Median Household Income’s Real and Nominal Growth, Advisor Perspectives)
Nonetheless, fewer SNAP users would affect Dollar General and its peers’ businesses.
Operating Margins
(Operating Margins Between Peers, Tabulated Data from Morningstar)
A quick peek among Dollar General’s peers revealed that the retailer had maintained its healthy lead of a five-year operating margin of about 10%. Dollar Tree (DLTR, Financial) had fallen in its margins after it acquired the less profitable Family Dollar last year for $8.7 Bil.
Dollar General
(Dollar General Stores and Distribution Centers, Annual Filing)
Dollar General is one the largest discount retailers in the United States by number of stores. The retailer has been growing its store count and has a three-year net store average increase of 660 stores from 2013 to 2015. As of July 29, the company had 12,967 stores in 43 states. The company was founded by J.L. Turner in 1939 as J.L. Turner and Son, Wholesale. The retailer then changed its name to Dollar General Corporation in 1968 and reincorporated in 1998 as a Tennessee corporation.
The retailer offers a broad selection of merchandise, including consumables, seasonal, home products and apparel at everyday low prices through convenient small-box locations. Dollar General stated that its merchandise includes high quality national brands from leading manufacturers, as well as comparable quality private brand selections with prices at substantial discounts to national brands.
According to its filing, Dollar General has four operating priorities: 1) driving profitable sales growth, 2) capturing growth opportunities, 3) enhancing its position as a low-cost operator, and 4) investing in its people as a competitive advantage.
Dollar General reports four business segments in its operations: 1) Consumables (76% of total sales in FY 2015), 2) Seasonal (12.4%), 3) Home Products (6.3%), and 4) Apparel (5.4%).
(Dollar General Store, Company Website)
The company also keeps a good list of trademarks: Dollar General, Dollar General Market, Clover Valley, DG, DG Deals, Forever Pals, I*Magine, OT Sport, Smart & Simple, trueliving, Sweet Smiles, Open Trails, Bobbie Brooks, Comfort Bay, Holiday Style, Swiggles, More Deals For Your Dollar. Every Day!, The Fast Way To Save, Save Time. Save Money. Every Day! and Ever PetTM. Dollar General also hold an exclusive license to the Rexall brand through March 5, 2020. Rexall is a chain of American drugstores, and the name of their store-branded products.
Cash, Debt and Book Value
As of July 29, Dollar General had $185 million in cash. The retailer had $3.6 billion in debt resulting into a debt-to-equity ratio of 0.56. Dollar General also had 48% ($5.5 billion) of its total assets ($11.6 billion) in goodwill and intangibles. The retailer also had a book value of $5.4 billion.
Cash Flow
(Dollar General Cash Flow, Annual Filing)
In FY 2015, Dollar General grew its cash flow from operations by 4.8% to $1.4 billion. Observably, the company had grown its deferred income taxes and accounts payable in that year. According to the retailer’s discussion, the 8.7% increase to $105.6 million in payables is due primarily to the timing of merchandise receipts and related payments.
Dollar General allocated $504.8 million in capital expenditures leaving it with $873 million in free cash flow. The company also reduced its debt and credit facility borrowings by $2.29 billion, while taking in $2.5 billion in borrowings.
Dollar General also provided $1.3 billlion in share buybacks while its annual price-to-earnings multiple was hovering at 19 times. The retailer also resumed its dividend since issuing it in 2008. Dollar General provided $258.3 million in dividends. The retailed also reduced its overall cash in the FY period by $421.9 million.
Valuations
According to Gurufocus data, Dollar General traded at a price-to-earnings ratio of 17 times (industry median of 20), price-to-book value of 3.8 times (industry median of 1.7), and price-to-sales ratio of 1 (industry median of 0.44). The retailer also has a trailing 12 month dividend yield of 1.28% with a payout ratio of 22%.
Graham Number calculation also provided an intrinsic value of $43 a share. This would represent that the current share price is significantly overvalued.
(Read more: Graham Number)
Market Performance
Dollar General had provided an average annual total return of 19%since 2010, while the broader S&P 500 had given back 12.49%.
Conclusion
Given an ongoing 20% pullback in Dollar General’s share price, one must wonder whether the company would eventually be able to recover its business operations again and wonder if it would be the opportune time to buy some shares in this established retailer.
Actually, the retailer’s same-store sales are not as dire as what the share price had indicated. In fact, the figures for the first half of its FY 2016 operations were significantly better than one of its bigger peer Target (TGT, Financial). Target had a first half average of 0.05% in comparable sales.
Nonetheless, Dollar General still had shown some possible vulnerabilities in its balance sheet should a broad market recession take place. Together with significant premium compared to the simple Graham number approach of valuation, conservative investors may rather just step aside and watch the company’s shares from the sidelines.
For aggressive investors, I also personally think that Dollar General stores would be able to recover and eventually be rewarded again by a premium by the bipolar market. Therefore, this pullback would represent a good time to go long in Dollar General.
Disclosure: I am long Dollar General.
Start a free 7-day trial of Premium Membership to GuruFocus.
