Whenever lazy analysts look at the discount store market, they compare Wal-Mart Stores Inc (NYSE:WMT) with Target Corporation (NYSE:TGT). As a result, investors have missed one of the decade’s biggest trends — discounting. It’s everywhere, as Dollar General Corp. (NYSE:DG) goes where Walmart fears to tread.
In neighborhoods that are too poor to support a Walmart, you’ll find a Dollar General. In towns that are too small to support a Walmart, you will find a Dollar General.
Dollar General offers everything Walmart does, but less. A smaller store, with less selection, but geared to the people who depend upon it. The result is the same low-price monopoly in these markets Walmart enjoys in larger towns and along freeway intersections.
Thanks to Dollar Tree, Inc. (NASDAQ:DLTR), whose cookie-cutter Family Dollar stores are often sited close to Dollar General, there’s no talk of monopoly, either. But the effect is the same.
The Dollar General Effect Is Growing
Walmart is often accused of destroying small town America. In fact, it began a process of delivering everyone the same low prices, on the same middle-class goods, found in urban centers. This is something small towns wanted, something the old downtown could not give people.
For those towns which thought their tiny size would make them immune to the Walmart Effect, there is Dollar General. In many places, they are the retail environment. What investors should know is that as they go, so goes small town America.
Over the past 10 years, Dollar General stock is up 218%. Over five years, the gain is 52%. Since the start of the year, though, DG stock is down 2%.
Dollar General is slowing, in part, because the impact of “innovations” Family Dollar brought to the market — alcohol and cigarettes — are in the shares. Family Dollar’s supply contracts with McLane Co., a unit of Berkshire Hathaway Inc. (NYSE:BRK.B, NYSE:BRK.A), brought these products into Dollar General markets, and Dollar General followed where it was legal. This has now gone about as far as it can, so same-store sales growth is slowing.
To keep its top line moving ahead, Dollar General is opening more stores. It won headlines by noting “10,000 new jobs,” but that’s 1,000 stores. A Dollar General means fewer than a dozen clerk jobs in your town.
As it runs out of its traditional customers, Dollar General is also opening a new format, DGX, targeting car-less millennials in urban markets with sodas, coffee and ready-made sandwiches.
If these sound like gas-less gas stations, the company has you covered there, too. Those Walmart Express stores it bought in 2016? They will be where Dollar General experiments with building real-life gas stations.
Knowing Where to Follow
Some will see the next sentence as a cut, and it’s not. Dollar General is not a leader, but it is expert follower.
Dollar General followed Walmart into small towns and did it smaller. Dollar General followed Family Dollar into beer and cigarettes, and evolved from a mini department store into a convenience outlet. Now Dollar General is building convenience stores; first in urban centers, and as time goes by, on highways once it figures out how to run the old Walmart outlets profitably.
Dollar General is not flashy. Dollar General does not move quickly. It is based in the Nashville suburb of Goodlettsville, where flashy is frowned upon. But Dollar General is effective.
For the quarter ending in April, due to be reported before the market opens June 1, analysts are expecting earnings of a dollar per share, hoping for $1.01, on revenue close to last quarter’s $6 billion. Beating those estimates will make Dollar General look good. Failure will tell you the current economic cycle is winding down.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at [email protected] or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.