Dollar General Corp. (DG) Is a Gem at Discount Prices

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Shares in Dollar General Corp. (NYSE:DG) fell hard after earnings that disappointed analysts, but may have cheered economists. For the quarter, DG earned $307 million, $1.08 per share, on revenues of $5.39 billion, against earnings of $292 million, 95 cents per share, and revenue of $5.1 billion a year earlier. Net profits were 31.2%, high for a retailer, and were up slightly from a year earlier.

DG Stock: Dollar General Is a Gem at Discount Prices

The problem was that same store sales were up only 0.7% from a year ago, which the company attributed to bigger transactions. Traffic was actually down, especially in home goods and apparel.

That was enough for traders, who dropped DG stock 13% on the open, briefly falling below $80 per share, after the company had previously been trading over $90 per share. The fall was especially sharp because expectations for earnings had been high.

Dollar General: Not a Dollar Store

Dollar General is commonly called a “dollar store,” but that is a misnomer. Dollar General might better be termed the department store of last resort, serving rural communities too small for a Wal-Mart Stores Inc. (NYSE:WMT) to operate, and food deserts in poor urban areas not served by grocers like The Kroger Co (NYSE:KR).

Within its niche, Dollar General competes most actively with Family Dollar, which was bought by Dollar Tree, Inc. (NASDAQ:DLTR) last year, after a fierce takeover battle with DG.

Dollar Tree itself is a true dollar store, in that all the merchandise costs $1. Dollar Tree can put stores in middle-class strip malls and serve bargain hunters coming in for party favors, small gifts or just to see what’s available.

Dollar General and Family Dollar customers, by contrast, may not have a choice on where to get life’s necessities, due to poverty or a lack of transportation (Dollar Tree also reported results below expectations and its stock has fallen 8% in early trade on Aug. 25.).

This is what may have changed in the last quarter. The tell for me is the categories where Dollar General was weak – home goods and apparel. These are items stores like Walmart always carry, at comparable or lower prices, but to buy them, you have to get to them, and poor people often can’t. With more people getting raises, and with gas cheap, maybe poor people can again.

In other words, the present problems with the low-end discounters may persist through the present recovery, but they may recover quickly in the face of another recession.

Dollar General has also benefited this decade from changes in its product mix, specifically, the addition of tobacco and alcohol to the product mix. Under former CEO David Perdue, now a U.S. Senator for Georgia, the stores did not usually stock these items.

In changing its strategy, DG mostly followed Family Dollar, whose stores are supplied exclusively by the McLane Co., a division of Berkshire Hathaway Inc. (NYSE:BRK.A, NYSE:BRK.B). Family Dollar moved aggressively in this direction, and Dollar General followed where it could under state laws.

Dollar General, however, has a broader, more diverse product mix than Family Dollar, which tends to have the same merchandise in most stores. DG stores will stock pork rinds where customers like pork rinds, and may have extensive liquor stores in small towns that otherwise lack them.

A Dollar General may look unkempt, but I learned in touring several for another publication that there is a management method to the apparent madness, with costs obviously kept low to encourage buyers to believe they are getting value for money.

Bottom Line on DG Stock

Management acted quickly in the face of the latest results. The company authorized repurchase of $1 billion in shares, representing about 5% of the common. DG also continued its regular 25 cent per share dividend, which at Thursday’s stock price represents a yield of 1.25%.

At its new price level, DG stock has a price-to-earnings multiple of 19, a bit higher than the market. But this is a company that regularly delivers over $10 billion in operating cash flow per year, on a market cap of under $23 billion, whose balance sheet has only 25% of assets under debt — reasonable for a retailer — and which continues to spend to grow, with $268 million in capital allocated over the last six months to open 510 stores and close 594 others.

In its earnings report, Dollar General also said it still expects fully diluted earnings for the full year will be up 10% to 15% over last year. The company can compete with anyone and is buying 42 Walmart Express stores — Walmart’s threat to build smaller stores and serve smaller communities was the most serious threat to Dollar General’s future, in my view.

In short, the company is a solid performer and you can get it now at a discount.

Dana Blankenhorn is a financial journalist who dabbles in fiction, his latest being The Reluctant Detective Travels in Time.  Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, did not hold a position in any of the aforementioned securities.

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Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Tweet him at @danablankenhorn, connect with him on Mastodon or subscribe to his Substack.


Article printed from InvestorPlace Media, https://investorplace.com/2016/08/dg-stock-dollar-general-gem-discount-prices/.

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