Shares of Dollar General (DG, Financial) have surged 36% in the last year. With the increase in consumer spending in the U.S. and the growing income of people, such discount retailers are expected to do well. In fact, the decline in gasoline prices has resulted in a higher purchasing power of people. Thus, demand for the necessities is on the rise. Moreover, people tend to spend more during the peak holiday season, wherein the retailers make most of their money.
Dollar General too witnessed an increase in demand for its products which clearly showed up in its fourth quarter numbers. The retailer has been registering good numbers for quite some time and the last quarter of FY 2014 was not an exception. Both the top line and the bottom line were ahead of the Street’s estimates, sending its shares higher. Let’s take a look.
The upsurge in numbers
Revenue for the quarter was up by 9.9% over last year, clocking in at $4.94 billion. This was almost in line with the analysts’ estimates and was primarily driven by a same store sales growth of 4.9%. Higher demand for its products and an increase in store traffic led to higher sales. Moreover, the company’s aggressive expansion plans and demand for categories such as health care, tobacco, snacks and perishables, helped the top line grow.
Both sales and the earnings of the company have been growing. In fact, the same-store sales growth metric has increased to 4.9% in the fourth quarter from a low of 1.5% in the first quarter of 2014. The discount store operator’s rapid expansion plans has been a key driver in this regard. Also, the store provides a wide variety of items in the range of $1 to $5, catering to the low income group people. Further, it plans to add 730 new stores this year and 900 new stores next year. Also, it would remodel 875 stores in the current year, in order to make it more attractive.
The earnings of Dollar General surged 16% to $1.17 per share, as compared to the previous year. The gross margin dropped 20 basis points to 31.7%, over last year. This decline was mainly because of higher sales of lower margin products. However, the company aims to focus on improving its margins in the future.
Efforts galore
The retailer has a number of plans to improve its business and register higher growth. For instance, it will be focusing on selling items for $1 to $5, in order to maximize sales. Also, it will be introducing items for $1 in categories such as home cleaning and food, which are most popular among customers.
The company has also opened 100 Dollar General market stores, which are lower in costs and located in the busy areas. These are full-service grocery stores which offer very low prices to the customers. Furthermore, Dollar General will be expanding its presence in three new states. It will be making marketing efforts such as a 3-day sale to the customers and gift cards of various restaurants, which has been attracting customer attention.
My takeaway
Although the dollar store operator lost its bid to acquire Family Dollar (FDO, Financial), it has huge scope for growth. It has been expanding its business, strengthening marketing efforts and registering good numbers. Additionally, it announced a cash dividend of $0.22 per share and a share buyback plan of $1 billion. These factors, along with a bright outlook, make me go long on this company.
