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Dollar General: Fabulous Results in Bad Times

A look at the retailer's first-quarter results

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The Science of Hitting
Jun 02, 2020
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Dollar General (

DG, Financial) recently reported financial results for the first quarter of fiscal 2020.

It was an impressive quarter for the retailer, with comparable store sales (comps) climbing 21.7% from growth in both transactions and ticket. As noted on the call, comps increased by 5.5% in February, followed by 34.5% growth in March and 21.5% growth in April. That growth was sustained through quarter's end, with comps climbing more than 20% in May. These results are reflective of stock-up trips in categories like consumables early in the quarter as behavior was materially impacted by the pandemic and shelter-in-place orders, followed by stronger growth in discretionary categories as U.S. consumers benefited from government stimulus and tax refunds.

Notably, as it relates to the company’s competitive positioning, comps for Dollar Tree’s (

DLTR, Financial) Family Dollar business in the first quarter increased by 1,800 basis points compared to the reported results over the previous four quarters. By comparison, the Family Dollar banner at Dollar Tree reported an increase of 1,400 basis points in the first quarter compared to the average result over the prior four quarters. To me, this suggests that Dollar Tree continues to outpace one of its closest competitors, even in an environment that was supportive for the laggard (a period when new or lapsed customers for any given retailer had a strong incentive to re-engage with the brand).

The increase in comps, along with continued growth in the store count, led to a 28% increase in revenues. The strong top-line results flowed through the income statement, with gross margins and operating margins expanding by 50 basis points and 250 basis points, respectively. The discrepancy between the two measures was due to significant operating leverage on higher same-store sales. The combination of sales growth and margin expansion led to a nearly 70% increase in operating income in the quarter to $867 million (inclusive of roughly $80 million in pandemic related investments). The net result was $2.56 per share in earnings, an increase of 73%. The diluted share count declined by roughly 3% year-over-year.

In the first quarter, the company opened 250 stores and completed nearly 500 remodels. For the year, management has maintained their previously communicated expectations for 1,000 new stores and 1,500 remodels throughout 2020. In addition to investing in the stores, the company also returned capital to shareholders. In the first quarter, the company repurchased $63 million of stock at an average price of $140 per share. The company has since decided to temporarily suspend share repurchases until it is “prudent to do so.” Given the strong results discussed above, along with management’s expectations that 2020 results will now exceed their original guidance on comps, sales and earnings, I’m honestly not sure what that means. It's not supported by the data.

Conclusion

Dollar General's results continue to be a stark contrast from what we're seeing at Dollar Tree. Simply put, Dollar General has a focused strategy and management team with a clear equation for financial success: comp store sales growth, new units, margin expansion and repurchases. The net result has been material earnings per share growth over the past few years while Dollar Tree has struggled. That result is also apparent when you look at their respective stock prices.

Dollar Tree has worked tirelessly in an attempt to improve results at Family Dollar, with some indication this may have led to a deterioration in results at its namesake banner. In addition, Family Dollar has limited their ability to grow the consolidated store base at a meaningful rate, along with an impact on capital returns to shareholders due to debt issuance to help fund the acquisition.

In the past, I’ve toyed with the idea of investing in Dollar Tree. I think the namesake banner is extremely valuable, and there’s optionality with Family Dollar. However, with another quarter behind us, I’ve been reminded yet again that Dollar Tree’s closest competitor, who is also largely insulated from the threat of e-commerce, continues to knock the cover off the ball. Dollar General is one of the best-run retailers that I follow, and for that reason, I’m reconsidering which of these two companies I’d prefer to own over the long run.

Here's Dollar General CEO Todd Vasos with the last word:

“For more than 80 years, Dollar General has served customers through a unique combination of value and convenience… We do very well in good times and we do fabulous in bad times… I think we’re very well positioned no matter what this economy does to both our core consumer and to the customer overall.”

Disclosure: None.

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