DG Stock – Dollar General Earnings Don’t Disappoint

DG stock continues to do well, despite the uncertainty of its bid for Family Dollar

   
DG Stock – Dollar General Earnings Don’t Disappoint

Dollar General (DG) reported second-quarter earnings this morning, and though the news mostly took a back seat to the ongoing battle for rival discounter Family Dollar Stores (FDO), the results were still worth digging into.

Dollar General earnings came in at 83 cents per share, right in line with consensus estimates. However, despite sales rising 7.5%, Dollar General’s revenue of $4.72 billion came in lower than the $4.77 billion expected by analysts. A year ago, Dollar General earnings hit 77 cents per share, and the company reported $4.39 billion in revenue.

DG stock maintained earnings and revenue projections for the coming year, but the company did revamp its same-store top-end sales guidance by half a percent. The company now expects 3%-3.5% growth over the coming year. Investors seem to be pleased with the news, sending DG stock up about 1.5% as of this writing.

Along with the Dollar General earnings announcement came a statement reaffirming the company’s commitment to buying FDO, with CEO Richard Dreiling saying:

“The financial benefits of our offer to Family Dollar shareholders are indisputable, and the proposed combination would unlock tremendous value for Dollar General shareholders. We continue to believe the potential antitrust issues are manageable and that our transaction as proposed is both superior and achievable.”

Dollar General’s latest offer of $78.50 per share was $4 more than rival Dollar Tree Stores’ (DLTR) bid from late July. However, the offer was rejected by FDO’s board of directors, saying they were wary of a Federal Trade Commission (FTC) anti-trust suit. The board did indicate they would still consider the Dollar General offer if they could be certain of FTC approval. At issue is the number of stores that such a merger would create, and the feeling is that the FTC would insist on either suitor divesting some of its stores to avoid violating anti-trust laws.

DLTR has already announced they would be willing to divest up to 500 stores. Not to be outdone, DG then said it would divest up to 700 stores. Both sides are trying to one-up each other, using anti-trust concerns to their advantage. However, since DG has many more stores than DLTR, the percentage of divestiture to total stores owned between both companies is actually quite similar.

FDO is holding all of the cards for the moment, and seems to be putting the squeeze on, saying that DG will have to divest several hundred more stores than they’ve announced. Speculation is running rampant that the board was exaggerating the anti-trust concerns, simply to hold out for a better deal for FDO stock price. It’s a brilliant strategic move that could ultimately work in its favor. Analysts such as Patrick McKeever, of MKM Partners, have said that DG could pay up to the mid-$80s per share of FDO stock and still add significantly to its bottom line from the merger.

However, the pressure from the FDO board has not hampered DG stock price one iota. That may be because Wall Street analysts feel that a merger between Dollar General and Family Dollar works better than one between Dollar Tree and Family Dollar. They cite similar pricing structures between DG and FDO, both stores having a strong presence in more rural areas, and both appealing to lower income consumers.

Family Dollar Stores CEO Howard Levine is said to favor the DLTR-FDO merger, perhaps because it includes an executive position for him. Given FDO’s recent poor track record, a guaranteed job would definitely hold an appeal for Mr. Levine.

A merger between DG and FDO would provide formidable competition to both Walmart (WMT) and Dollar Tree. Walmart recently put out a television ad in which they compare their prices to Dollar General Stores, suggesting a heightened competition between the two discounters.

As you can see from the accompanying chart, DG stock has been strong recently, gapping up from $58 to over $63 per share after the bid for FDO was announced. DG stock has a 52-week range of $53 to $65.99.

dg stock chart DG Stock   Dollar General Earnings Dont Disappoint
Source: Stockcharts.com

However, the difficulty for investors is that the ultimate winner of the ongoing Dollar General vs. DLTR battle for FDO is still to be determined. Should it be Dollar Tree, DG stock is very likely to suffer a large selloff, perhaps back to the $58 level, especially since the stock is technically quite overextended at the moment.

Despite reassurance from analysts, if a mid-$80s stock price bid becomes necessary in order to achieve the FDO purchase, it will reduce the earnings potential going forward for DG stock. More prudent investors should wait to see who ultimately prevails and the terms that are announced before purchasing further shares of DG stock.

Ethan Roberts does not own shares of any of the companies mentioned in this article


Article printed from InvestorPlace Media, http://investorplace.com/2014/08/dollar-general-earnings-dg-stock/.

©2014 InvestorPlace Media, LLC

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