Dollar General: Returning to Normal Following 4th-Quarter Results

The discount retailer's shares missed earnings predictions despite strong growth

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Margaret Moran
Mar 18, 2021
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Before the markets opened on March 18, Dollar General Corp. (

DG, Financial) released the earnings results for its fourth quarter and full year of fiscal 2020, which ended on Jan. 29.

Although the U.S.-based discount store chain grew its top and bottom lines compared to the previous year, it fell short of analysts' predictions on the earnings front and issued weak guidance, causing shares to plunge around 5% throughout the day's trading.

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Earnings results

In full-year 2020, the company's revenue increased 21.6% to $33.74 billion while adjusted earnings per share totaled $10.62 compared to the previous year's $6.64.

For the quarter, Dollar General reported revenue of $8.41 billion, representing a 17.6% increase over the prior-year quarter. Adjusted earnings came in at $2.62 per share compared to $2.10 in the same quarter of fiscal 2019. Analysts had called for revenue of $8.29 billion and adjusted earnings of $2.72.

Same-store sales were up only 12.7% for the fourth quarter versus 16.3% for the full year, representing a slowdown in growth. Likewise, the operating profit increased by 21% to $872.2 million for the quarter and by 54.4% to $3.6 billion for fiscal 2020. The annual cash flows from operations rose 73.2% to $3.9 billion.

The company declared a 16.7% dividend increase to 42 cents per share and also added $2 billion to its share repurchase authorization after buying back $2.5 billion worth of shares in fiscal 2020. As of the quarter's end, the company had cash and cash equivalents of $1.37 billion on its balance sheet.

Todd Vasos, Dollar General's CEO, had the following to say:

"Our full-year results were highlighted by significant growth on both the top and bottom lines, including a net sales increase of 28.1% in our non-consumables business. In addition, we completed 2,780 real estate projects, including the opening of our 17,000th store and launch of our new pOpshelf concept, while delivering our 31st consecutive year of same-store sales growth. We continue to operate from a position of strength, and are excited about our plans for 2021 to continue delivering value and convenience for our customers, along with long-term sustainable growth and value for our shareholders."

Looking forward

For fiscal 2021, the company is expecting revenue to remain flat or decrease up to 2% compared to 2020. It also projects same-store sales decline of 4% to 6%, which would give it 10% to 12% growth on a two-year stack basis. Diluted earnings per share is projected to be between $8.80 and $9.50 for a two-year compound annual growth rate of 15% to 20% (or 14% to 19% on an adjusted basis).

This guidance aims to normalize numbers from the spike and drop of the Covid-19 pandemic. Dollar General has experienced slow and steady growth throughout its history, and the pandemic-related unemployment levels caused a sharp spike in demand for its cheaper product offerings that is expected to return to the average growth line in the near future.

"While we remain cautious in our 2021 sales outlook given the significant uncertainty that still exists, our guidance reflects low-double-digit same-store sales growth on a two-year stack basis, which we believe speaks to the underlying strength of the business," Chief Financial officer John Garratt said. "In addition, our diluted EPS guidance reflects a compound annual growth rate over a two-year period that is well above our long-term goal of delivering at least 10% annual EPS growth on an adjusted basis."

Valuation

With Dollar General's earnings and growth trends are expected to go back to normal, investors who are wary of holding "pandemic stocks" as new Covid-19 cases begin to dwindle will likely abandon the stock. After pandemic investors and opportunistic traders exit, the stock will likely go back to the same pattern it has exhibited for much of its history: slow growth.

As shown in the Peter Lynch chart below, Dollar General's stock has historically traded between its Peter Lynch earnings line and its median historical valuation line. The price has recently dipped below the median historical valuation line for the first time since early 2019, meaning investors who are interested in the stock may have an opportunity to take up a stake.

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On the other hand, if Dollar General's estimates come true and it ends up with results that disappoint investors and miss Wall Street's projections over the next year, there could easily be a better entry point in the near future.

Disclosure: Author owns no shares in any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation. Investors should always conduct their own careful research and/or consult registered investment advisors before taking action in the stock market.

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