Dollar General Corporation (DG, Financial) recently reported second-quarter results that showed strong growth year-over-year. The current inflationary environment is driving consumers to seek out cheaper goods, putting the dollar store chain in a prime position to capture busienss. Let’s look closer at Dollar General and its most recent quarter to see why it is my favorite discount retailer.
Earnings highlights
Dollar General reported its second quarter earnings results earlier this month. Revenue grew 9% year-over-year to $9.43 billion, which was $26 million ahead of Wall Street analysts’ estimates. Adjusted earnings per share of $2.98 was above last year’s $2.69 and was 5 cents better than excepted.
Same-store sales, a much clearer view of the company’s performance then just total revenue, were up 4.6%. Traffic was up slightly and average basket size did increase, though mostly due to inflationary costs. The real strength was in consumable products; this area was the main driver of growth during the quarter. At the same time, higher-end non-consumables declined from the prior-year period.
Gross margins improved 69 basis points to 32.3% as the company benefited from an increase in inventory markups. This was partially offset by higher transportation and distribution costs, a larger percentage of revenue from lower-margin product categories and markdowns.
Rounding out the quarter, Dollar General opened 227 new stores and repurchased 1.5 million shares at an average price of $233.46. After adding an additional $2 billion to its current share repurchase authorization, the company has a total of $3 billion, or 5.6% of its market capitalization, with which it can buy back stock in the future.
Leadership provided partially revised guidance for 2022. The company still expects adjusted earnings per share to grow 12% to 14% from 2021. Revenue is now projected to grow 11%, compared to prior estimates of 10% to 10.5%. Comparable sales are forecasted to be up 4% to 4.5% for the year.
Takeaways
The growth in same-store sales is a positive, especially following last year’s 4.7% decline. Recall that the second quarter of 2021 was up against a difficult period that benefited from Covid-19 panic buying. Over the last three years, Dollar General’s second-quarter comparable sales growth rate is nearly 19%.
Merchandise levels have gotten larger, up 25.1% per store to $6.9 billion. The increase was due to products with higher values, such as those found in the Home and Seasonal categories, and inflation pressure. This will be an area to watch as high levels of inventory could mean an eventual markdown in product prices.
As with other retailers, inflation is impacting Dollar General’s business results. The company has taken steps to reduce this impact, including the rollout of DG Fresh, which is Dollar General’s move to distribute frozen and refrigerated goods. The company delivers these products from its own facilities to all of its stores, which has helped lower product cost in these areas. Leadership expects that it will be able to deliver produce to approximately half of its store locations eventually.
To improve the shopping experience, Dollar General has invested heavily in not only opening new stores, but also remodeling and relocating existing locations to further increase their product offerings. Along with new openings, the company remodeled 533 stores and relocated another 30. Leadership noted that the company will open as many as 1,060 new stores this year, remodel almost 1,800 and relocate another 125. The majority of new stores will be larger format as well, allowing the company a wider range of products to market.
The company has focused on adding to areas that help drive customers to stores. For example, Dollar General installed more than 17,000 cooler doors during the period and has plans to install more than 65,000 this year.
The company is expanding its health offerings as well, with as many as 400 additional products being rolled out to 4,000 stores by the end of 2022. Long-term, Dollar General aims to improve its health care product line and services through its stores. This could be especially important in rural areas of the U.S., which often don’t have a big box retailer to provide basic over-the-counter medications. Appealing to these underserved areas could help to grow the company’s customer base. Three-quarters of the country lives within five miles of a Dollar General location, which should only increase as the company aggressively expands its store count.
Dollar General would likely hold up much better than fellow retailers in a recessionary environment as 80% of its products are priced at $5 or below. Consumers often trade down during tough economic conditions, with dollar stores being an ideal way to make money stretch further. It was noted on the conference call that some of the increase in store traffic was a result of more affluent shoppers, those with incomes approaching $100,000, visiting locations more frequently.
Guidance remains positive for Dollar General. Top-line projections will benefit from an additional week for the year, but a return to positive same-store sales is a good sign. Dollar General's comparable sales fell 2.8% in 2021, but the updated guidance puts Dollar General back to where it was before last year. At the midpoint of guidance, same-store sales would have a three-year stack rate of nearly 18%.
Valuation analysis
Dollar General is trading a small discount to its intrinsic value according to the GF Value chart.
With a current share price of $239 and a GF Value of $248.30, the stock has a price-to-GF-Value ratio of 0.96. Dollar General is rated as fairly valued by GuruFocus.
The GF Score is very high at 92 out of 100. For context, its nearest competitor, Dollar Tree Inc. (DLTR, Financial), scores just 70 out of 100. Dollar General scores well on growth and profitability, with middling scores for GF Value and momentum and a lower score for financial strength.
Final thoughts
Dollar General’s most recent quarter was a return to same-store sales growth, which resulted in revenue guidance for the year being lifted. The company is investing heavily in its current locations and in the opening of new stores as it expands its sizeable reach.
Inventory growth was high, though some of this was due to inflationary pressures. Inflation is a challenge, but Dollar General is taking steps to help reduce the headwind. On the plus side, consumers appear to be visiting stores more due to the lower price point, an attractive feature of the company’s business model in recessionary times.
Shares of the company aren’t offering much of a discount at the moment, but Dollar General does have an impressive GF Score. The company is also one of the top names in its industry and continues to aggressively update and expand its store locations and its product offerings. For those looking for a discount retailer that can work under all market conditions, including the current high inflation environment, Dollar General could be an appealing option in my opinion.
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