If there are businesses that you expect to prosper in difficult times, they'd include deep-discount retailers like Dollar General (DG -0.41%). Rising interest rates, persistent inflation, and elevated gas prices cause consumers to tighten their wallets and drive them to dollar stores to save money.
Even well-heeled consumers start shopping down-market, as we just saw with Walmart's earning report, which said that more than 50% of the big jump in grocery sales was fueled by an influx of high-income shoppers.
Image source: Getty Images.
Everyone loves a bargain, and dollar stores offer some of the best bargains around. But Dollar General just gave a business update that forecast lower comparable-store sales and earnings than it previously expected, sending its stock lower.
With shares down 17% from their recent highs, is Dollar General a stock to buy right now? Let's find out.
Snowed under
Over the past decade Dollar General was a tremendous growth stock, generating a 400% total return for investors compared to a 217% return from the S&P 500. More recently, however, the deep discounter struggled with pandemic-induced inventory issues and supply chain problems that ended up breaking a continuous, 31-year-long run of same-store sales growth.
A bomb-cyclone weather event around Christmas brought high winds, record-cold temperatures, and blizzards across much of the U.S. and Canada, and Dollar General blames the storm for most of the fourth-quarter shortfall it just preannounced. Higher-than-expected inventory damages from the storm were also a contributing factor, and also lowered comps in December.
Dollar General said it had expected comps to come in between 6% and 7% for the quarter, and same-store sales had been in the mid-6% range in November and January. But in December they dropped to 4.5%, causing comps to come in at 5.7% for the period.
And while the deep discounter had guided for earnings in a range of between $3.15 per share and $3.30 per share, it now believes they will be between $2.91 and $2.96, a 9% drop at the midpoint.
That's a disappointing outcome, but there's still reason to be hopeful. Comps obviously bounced back the month after the storm to the previously elevated rate, and earnings will still be 13% to 15% above the year-ago figure, so Dollar General isn't in decline.
Image source: Dollar General.
Diminished expectations
Yet the company has offered a muted full-year outlook for the coming year, forecasting a 3% to 3.5% increase in same-store sales -- below Wall Street's expectations of a 4.5% rise -- and a 4% to 6% increase in earnings per share.
Part of the cause is the rising interest-rate environment Dollar General and other retailers find themselves in, as rate hikes are taking 3 percentage points off what it otherwise would have guided toward. Also, the just-ended year had a 53rd week of sales that won't be repeated this year, so that will swipe about 4 percentage points of comparability from the results.
That 53rd week is why fourth-quarter comps were impacted so disproportionately by the winter storm. Not only did it hit in the run-up to Christmas, a typically important period for all retailers, but it hurt what otherwise would have been an extra week to generate additional sales.
A discounted deep-discounter
At 21 times trailing earnings, 18 times next year's estimates, and 1.3 times sales, Dollar General is pretty much in line with its historical valuations. While that's because it's lowered its earnings outlook several times this year as supply chain problems became overwhelming, the company is still growing and expanding its footprint.
Management doesn't seem to have changed its outlook for new store openings, which it predicted would total some 1,050 locations in 2023. Dollar General still sees significant expansion opportunities.
This is a lull in what had otherwise been an unstoppable progression higher. It gives investors a buy-in point for a deep discount retailer that, despite this year's turbulence, is still in the sweet spot of overall consumer demand.
