Since losing its battle for Family Dollar to Dollar Tree (NASDAQ:DLTR) in the middle of the last decade, Dollar General has caught a second wind of growth. It is leaving its one-time rival in the dust.
Even with the recent collapse of stock prices over the coronavirus from China, Dollar General stock sports a five-year gain of 85%. Only in the last few months has Costco stock outperformed it. Dollar General’s dividend has also increased from 32 cents per share to 36 cents.
Dollar General’s growth may also be more sustainable than Costco, which can spend over $100 million setting up a single warehouse.
Investors agree with me, because Dollar General stock is also more expensive than Costco by some measures.
Think General Store
Dollar General first emerged as a franchise store of last resort, in poor urban neighborhoods and towns too small to support a Walmart (NYSE:WMT). Some urban centers still resent such “dollar stores,” saying they create “food deserts,” where people can’t get fresh produce.
But not every Dollar General is a food desert. The store in Flatonia, Texas, which I have visited, is the best place within miles to get fresh produce. The store in Limon, Colorado, which I have also visited, offers not just beer and wine, but liquor. The chain is introducing a “city format” called DGX, half the size of a regular store, with upscale merchandise.
Under CEO Todd Vasos, who has been in position at the Nashville-area headquarters since 2015, Dollar General is less a dollar store than a general store. Some of its outlets are messy with cut-rate merchandise, but others are as clean as a Target (NYSE:TGT). It all depends on what customers want.
Dollar General is small where markets are small. It sells pork rinds where people buy pork rinds. It’s rich where its customers are rich. This has led to steady growth of about $2 billion in sales per year, and net income up about 50% since fiscal 2017.
For its January quarter, reported March 12, Dollar General had net income of $535 million, $2.11 per share, on revenue of $7.2 billion. For the year sales were up 8.3%, and the dividend was increased by over 10%, to 36 cents per share. The numbers easily beat analyst estimates.
I called Dollar General “an all-weather buy” in March 2017. Since then the stock price has doubled. Dollar General opened for trade March 20 at $142 per share, a market capitalization of $36 billion and a price-earnings ratio of 22.3. That’s close to the Schiller P/E of the market.
Dollar General’s market cap is 36% higher than its annual revenue, while Costco still sells at a discount to revenue.
The only thing it lacks is an extensive online presence. The current website looks 10 years old although it does offer delivery.
The Bottom Line on DG Stock
Dollar General is like a weed, but in a good way.
Weeds come up through sidewalks, abandoned streets, anywhere they can find sunlight and water. Dollar General takes over towns too small for a giant department store and neighborhoods too poor for a grocery store.
Dollar General has ample room to keep expanding, and a proven niche. It can increase its online presence as well. Underestimate it at your peril.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of the environmental thriller Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.