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Dollar General Earnings: Is DG the New Dollar Store Champ?

Dollar General (DG) beat earning estimates on Tuesday, and, as you’ll see, I may have found a new play in the dollar store arena to replace former favorite Dollar Tree Stores (DLTR).

Dollar General LogoDollar General stock reported earnings of 84 cents per share, a 16.7% year-over-year increase that topped estimates by two cents. Much of those gains came on the heels of a strong 8.8% sales increase to $4.92 billion.

Sales were strong in every category, showing that demand at the dollar price point is picking up again.

Dollar General stock said consumables rose a robust 9% to $3.76 billion. Seasonal products rose 8.3% to $586 million. Home products jumped 6.9% to $303 million, while apparel sales rose 9.5% to $275 million.

I find the apparel category particularly interesting. This is not an area I expected to see DG — or any dollar store — get into. DG could provide growing competition for clothing retailers, particularly those on the low end like The Gap’s (GPS) Old Navy.

Meanwhile, those all-important same-store sales grew an acceptable 3.7%, thanks to both higher store traffic and higher total basket expenditure.

Dollar General Stock Much Improved

One metric with Dollar General stock that investors don’t pay enough attention to are gross margins. It’s great if earnings are growing, but if margins are declining, earnings beats are less impressive. Fortunately for Dollar General stock, margins widened 45 basis points to 30.5%, on its 10.4% gross profit increase.

DG repurchased 7.1 million shares during the quarter, so it is critical that we back that out of their EPS calculation to find true organic growth. We can do that by looking only at the net income number, which increased from $222 million to $253 million, or 14%.

That’s good news. Those numbers show strong growth for a dollar store in this day and age. Moreover, net margins also increased from 4.92% to 5.15%.

Meanwhile, Dollar General stock is in good shape financially, with $225 million in cash, and just $2.61 billion in debt, accruing interest at a rate of only 3.4% annually.

This organic growth in Dollar General earnings occurred even though DG added another 210 stores during the quarter.

On a valuation basis, Management said to expect Dollar General earnings to come in between $3.85 and $3.95 per share for the full year. With Dollar General stock trading at $75, that puts it at about 19x this year’s earnings.

Dollar stores have been going through some interesting times. In the past, when I did side-by-side comparisons, Dollar Tree always won. The company has spectacular metrics in comparison with its competitors. However, as I mentioned recently, Dollar Tree vastly overpaid for a weak company in Family Dollar Stores (FDO).

DG metrics just always fell short. Although it has a market cap 40% greater than DLTR, it carries six times as many employees, yet only generates about twice the revenue. Consequently, its gross margin was about 1,000 basis points lower than DLTR’s. Operating margins are 9% compared to DLTR’s 12%.

Bottom Line

I think Dollar General stock is still too expensive at this price, but its price is probably inflated thanks to that stupid DLTR acquisition price for FDO.

If Dollar General stock declines into the high-50s, I would consider buying it, but I also want to see some serious margin expansion. For that to happen, the company needs to be more efficient with its stores, and cut employee overhead big-time. But if it made those changes, Dollar General stock would suddenly become very attractive.

Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. As of this writing, he did not hold a position in any of the aforementioned securities. He has 20 years’ experience in the stock market, and has written more than 1,200 articles on investing. He also is the Manager of the forthcoming Liberty Portfolio. Lawrence Meyers can be reached at

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