Monday, July 20, 1998

Dollar General Corp.
(NYSE: DG) Phone: 615-783-2014 Website: http://www.dollargeneral.com
Price (7/17/98): $45 1/16

Everybody knows that Wal-Mart's (NYSE: WMT) superstores can turn everyday low prices into big money, but this category killer can't compete with Dollar General in the market for cozy hometown general stores. The General has sent troops out in force and seems to be conquering half the countryside, a fact that's reflected in the kind of results that would have General Washington seeing green.

Dollar General has been a steady and improving performer for the last decade, as net margins have inched from 1.1% to 5.5% and EPS have compounded at 36% annually over this time. Return on equity last year hit 27%, up from 25.4%.

The company's recent success, though, has been reflected in months of double-digit same-store sales gains that have helped send overall revenues soaring by 31% so far this year. Improved sales and new store expansion near present strongholds have boosted profits even faster, with first quarter EPS up 64% to $0.18.

The terrific results of late owe a lot to a new merchandising strategy initiated in March of '97. To meet customer demand, Dollar General added 700 faster-moving consumable items to its product mix while converting stores so that more space was allocated to such "hardline" items. Hardline sales now account for 82% of sales.

Giving the people what they want is the hallmark of a market leader, and the honors have begun pouring in. The stock received a nice boost following word that the General would be installed in that hallowed pantheon known as the S&P 500.

BUSINESS DESCRIPTION

Based in Nashville, Tennessee, Dollar General is a leading discount chain with more than 3,320 neighborhood stores. It operates in 24 states in the Southeast, Midwest, and Texas.

The stores are just 6,400 square feet and located close to consumers in towns with fewer than 25,000 inhabitants. The chain serves mainly low, middle, and fixed income families, offering general merchandise such as health and beauty aids, packaged food products, cleaning supplies, housewares, and non-fashion apparel.

The retailer has doubled its selling space in the last four years by adding over 1500 new stores. Meanwhile, same-store sales growth has accelerated from 5.1% in FY96 to 8.2% in FY97 to 8.4% in FY98 (ended in January). Over the last four years, General Dollar has delivered 23.4% compound annual growth in sales, 30.9% growth in operating income, and 31.4% gains in net income.

The company squeezed sales, general, and administrative expenses to 19.3% of sales last year from 21.7% in FY94. Last year, it installed point of sale scanners in all stores, and it will soon be using transportation management software from Manugistics (Nasdaq: MANU).

After adding 435 net new stores last year, the retailer opened 151 new stores in the first quarter with a goal being 500 to 525 for the year. Also, the firm is now building a new $50 million distribution center as part of its plan to double distribution capacity by November 1999.

After the recent sale of some 7.5 million shares by the Turner Children Trust, the family of Chair/CEO Cal Turner Jr. owns 18% of the stock.

FINANCIAL FACTS

Income Statement

12-month sales:    $2,812.6 million  
 12-month income:     $155.7 million 
 12-month EPS:                 $0.91 
 Profit Margin:                 5.5%  
 Market Cap:          $7,750 million 

Balance Sheet

Cash:                 $37.2 million 
 Current Assets:      $756.6 million 
 Current Liabilities: $397.8 million  
 Long-Term Debt:        $0.4 million 

Ratios

Price-to-earnings:             49.5 
 Price-to-sales:                 2.8

HOW COULD YOU HAVE FOUND THIS DOUBLE?

Though Dollar General's margins have slightly outpaced sales over the last year, it would have been tough to spot this developing story from the often trusty rising margins screen. Yet the equally easy-to-use monthly retail sales reports would have suggested this General would be rewarded Daily Double stars before long.

WHERE TO FROM HERE?

By August, the company expects to have rolled out a line of family oriented basic apparel (jeans, khakis, t-shirts, and knit shirts) in all of its stores. That should spice up sales some. Yet with its successful merchandising programs completed by August of last year, the company has begun to run up against tougher year-over-year comparisons. Turner has warned investors about this several times in recent months.

Sales do appear to be stalling, and seem likely to revert to the long-term target of 20% to 23%. Turner said May represented "results more in line with our expectations," in contrast to the ebullient first quarter. Same-store sales for May were 14.4%. June comparable-store sales fell to 7.8%, the lowest level in months. Furthermore, a bunch of insider sales around $40 a share suggests the stock may be trading for top dollar.

Consensus estimates for this widely followed stock call for earnings of $1.09 a share in FY99 ending in January and $1.34 a share for FY00. That's 27% annualized growth over the next three quarters and 25% over the next seven quarters. Both figures are above the analysts' long-term rate of 24%.

So the PEG stands at an expensive 1.8 and the more useful YPEG at $26, or $32 if you want to look further ahead. With a good balance sheet, intelligent management, and a terrific track record, the company's stock deserves to trade at a slight premium. But the troops seem to have gotten ahead of the General here.

Still, the company gets high marks for publicizing its quarterly conference calls. Even better, investors can keep track of weekly sales trends, announced Mondays at noon CST, by calling 615-783-2117.

-- Louis Corrigan (TMFSeymor@aol.com)

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