Shares of the discount retailer Dollar General (DG) lost as much as 4% in early action on Thursday, after reporting higher-than-expected earnings on subpar revenue and same-store sales growth. Until Thursday, DG stock had been beating the market, gaining 8.5% this year to the S&P’s 5.8% loss.
The selloff in DG stock is also partly to do with concern over the new competitive landscape Dollar General will operate in from now on, after Dollar Tree (DLTR) acquired Family Dollar (FDO). Dollar General itself had been hoping to snag FDO, but was beat to the punch by DTLR.
Dollar General is preparing by upping its spending on labor, allocating more hours to employees to improve store quality and draw in more traffic.
However, since the Dollar Tree and Family Dollar deal didn’t officially close until July 6 (Dollar General’s fiscal second quarter ended July 31), third-quarter results should be more indicative of how the new dynamic affects DG stock.
Mixed Numbers, But Dollar General Is Still Growing
DG earnings came in at 95 cents per share, beating Wall Street estimates by a penny. Profits of $282.3 million were up 12.4% year-over-year.
So far, so good.
The reason DG stock is getting slammed in Thursday’s early trading isn’t the earnings beat — it’s the revenue miss. Although revenue rose 7.9% to $5.1 billion, analysts expected $5.14 billion in sales. Arguably worse than the revenue miss, however, was the disappointing same-store sales growth.
Same-store sales rose 2.8% in the quarter, missing the 3.6% consensus figure by a full 80 basis points.
While 2.8% comparable store sales growth is nothing to write home about, Dollar General isn’t Shake Shack (SHAK), either. The major catalyst for DG stock will simply be expanding its store base going forward.
Growing its store base and figuring out how to use its square footage most efficiently is constantly on the company’s mind. In 2015, management expects to open 730 new stores and relocate or remodel 875 locations. That breaks down to 6% growth in its overall square footage. In 2016, DG is looking to actually accelerate its growth, aiming for a 7% increase in its square footage.
Importantly, the company is returning money to Dollar General shareholders by repurchasing DG stock. Since 2011, the company has repurchased $3 billion worth of its own shares at an average price of $55.64 per share. With DG stock closing at $76.71 yesterday, that $3 billion had earned a 38% return … or $1.14 billion.
Bottom Line on DG Stock
Although Wall Street is selling DG stock on a few ho-hum second-quarter numbers, I believe that’s shortsighted. Dollar General reiterated its 2015 guidance, projecting revenue to rise between 8% and 9%, same-store sales to rise between 3% and 3.5%, and earnings per share to clock in between $3.85 and $3.95.
With DG stock also dishing out a modest 1.2% dividend yield, value investors — or anyone looking to reposition into some lower-risk stocks in the wake of the recent selloff — should strongly consider buying Dollar General shares on the pullback.
As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at firstname.lastname@example.org.
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