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The Science of Hitting
The Science of Hitting
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Dollar General: Another Step Forward

Some thoughts on the retailer following first quarter results

June 04, 2019 | About:

Dollar General (DG) reported financial results for the first quarter of fiscal 2019 on May 30.

It was a strong start to the year, with same store sales (comps) increasing 3.8% due to a combination of traffic and ticket growth. That was quite a bit better than Dollar Tree (DLTR), with comps for the Dollar Tree banner up 2.5% and comps for Family Dollar up 1.9% (with the latter being the closer peer to Dollar General). Looking at the two-year stacked comp, which smooths out some of the noise that can be driven by one-time events in any given quarter (like weather), we can see that Dollar General has posted attractive comps for some time:

Note that the fourth quarter of fiscal 2018 benefited by roughly 70 basis points from the early release of February SNAP payments as a result of the government shutdown; this was a headwind in the current quarter (management estimates it was a hurdle of roughly 35 basis points).

The store count at quarter end was 15,597, an increase of 6% from a year ago. The company still plans to add nearly 1,000 new stores in 2019, which implies comparable unit growth (in percentage terms) to recent years:

(For what it’s worth, management recently commented that they see room for an additional 12,000 units for the Dollar Store sector from here.)

Slight gross margin compression (due to a higher mix of consumables) and SG&A deleverage was offset by share repurchases (the share count declined 3.3% year-over-year), with earnings per share climbing 9% to $1.48 per share. Management reiterated fiscal 2019 guidance, which calls for a 2.5% increase in comps, a 7% increase in revenues and mid-single digit earnings per share growth. The company is on the way to their 30th consecutive year of same store sales growth. As shown below, Dollar General has a consistent record of growth (the earnings per share CAGR since fiscal 2010 has been in the mid-teens):

Against 2019 earnings per share of around $6.4 per share, the stock trades at roughly 20 times forward earnings. Between low-single digit comp growth, mid-single digit unit growth, and share repurchases, Dollar General appears on pace to deliver high-single digit earnings per share growth for the foreseeable future (as CEO Todd Vasos noted on the fourth-quarter conference call, “New store growth remains one of the best uses of our capital,” with after-tax IRRs north of 20%). Inclusive of the dividend and assuming no change in the valuation, that’s a setup for roughly 10% annualized returns. Considering that this has been one of the top performing companies in retail, that valuation appears reasonable. An interesting comparison is Walmart (WMT), which trades at a comparable multiple of forward earnings.

Between the two companies, Dollar General has a larger opportunity for unit growth - and by a wide margin ("Our proven, high-return, low-risk model for real estate growth remains a core strength for our business"). In addition, there’s less risk from e-commerce, both in the sense of the potential impact on its core business, as well as the investments that have been made by each company in the space (most notably Walmart’s Flipkart investment). That’s a long way of saying that Dollar General looks good relative to Walmart – as well as many other retailers that are ill-prepared to fend off the competitive threat from Amazon (AMZN), Costco (COST) and others.

There’s a strong case for owning Dollar Tree as well, but I remain concerned that management is spending a significant amount of time and effort on the Family Dollar turnaround (without much to show for it so far). On the other hand, Dollar General is 100% focused on a single banner / business model. It is in the early stages of a number of initiatives (like the Non-Consumables Initiative, DG Fresh and continued investment in coolers) that have the potential to materially improve the company’s financial results as well (they come with a short-term hit of roughly $50 million to SG&A). As Vasos noted at an investor event in April, this is the largest number of initiatives that has been underway at any point during his 11-year tenure as CEO.

I don’t own Dollar General or Dollar Tree at this time, but that would change at the right price.

Disclosure: None.

Read more here:

A Look at Dollar Tree's Start to Fiscal 2019

An Update on Markel After a Tough Year

Under Armour: 'Exactly Where We Want to Be'

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About the author:

The Science of Hitting
I'm a value investor with a long-term focus. My goal is to make a small number of meaningful decisions a year. In the words of Charlie Munger, my preferred approach is "patience followed by pretty aggressive conduct." I run a concentrated portfolio - a handful of equities account for the majority of its value. In the eyes of a businessman, I believe this is sufficient diversification.

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