Will Dollar General Continue to Avoid the Retail Doldrums?

Do healthy earnings and a strong outlook make Dollar General a buy?

Feb 20, 2014 at 11:29AM

The US retail industry is in a downward spiral as consumers remain wary of economic fallout. Even with these challenging circumstances, Dollar General (NYSE:DG) hasn't disappointed investors as it continues to grow. Let's see where the company is heading and how it stacks up with its competitors Dollar Tree (NASDAQ:DLTR) and Family Dollar (NYSE:FDO).

Third-quarter results
The company's net sales in the third quarter increased 10.5% to $4.38 billion from $3.96 billion in the year-ago quarter. Net income increased by 14% to $237 million or $0.74 per share. Same-store sales also grew by 4.4%.

Consumable sales remained on the higher side with 12% growth in the quarter. However, non-consumable sales, especially tobacco sales, struggled. Seasonal and home product sales grew by 7.3%, whereas the sales growth for apparel was only 2.4%

The company's net profit margin increased by 18 basis points to 5.42%, which was attributed to lower operating costs thanks to a decrease in labor costs.

What's cooking at Dollar General?
Dollar General has been increasing its store count over the past few quarters. From the start of fiscal 2013 until the third quarter, the company closed 22 stores and remodeled 53 others. It also opened 650 stores during the same time period. In this tough retail environment, the retailer has made the bold move of expanding to capture more market share; this move seems to be paying off as the company had solid comps growth in the latest quarter. To keep up the momentum, Dollar General plans to open about 700 new stores in fiscal 2014 and remodel or relocate approximately 525 stores; this will result in its store-selling square footage expanding by 6%-7% within 2014. In addition, a new distribution center in Pennsylvania is expected to become operational during the first quarter of fiscal 2014.

The company has said that it is going to sell and subsequently lease back approximately 233 of the 11,000 stores it currently owns, and it has already signed an agreement to do this. The deal will result in proceeds of $200 million to the company and it is expected to close very soon. The proceeds will be used to return value to shareholders via share repurchases. From the start of fiscal 2013 until the end of the third quarter, Dollar General bought back 7.8 million shares worth $420 million. Moreover, the company's board of directors recently authorized an additional $1 billion of share repurchases.

Dollar General has raised its earnings guidance from $3.15-$3.22 to $3.18-$3.22 as it expects a strong performance during the fourth quarter. For the full year, the company anticipates that its sales will rise by 10% to 11%, coupled with comparable-sales growth of 4% to 5%.


In the table above, we can see that Dollar General has provided a high year-over-year return of 24%. The low price to earnings ratio of the company suggests that it's a good bargain at this moment. Moreover, a low price-to-earnings growth, or PEG, ratio of 1.16 strengthens my belief that Dollar General is a value stock.

In the first quarter of fiscal 2014, Family Dollar Stores fell short of its earnings expectations as it reported earnings per share of $0.68. Sales growth was 3.2%, which was much slower than growth in the previous quarters. Comparable sales also grew by just 2% amid tough economic conditions. Keeping the economy in mind, Family Dollar has given conservative guidance for its full-year earnings. Now it expects to earn $3.25-$3.55, which is far less than its prior earnings guidance of $3.80-$4.15.

Dollar Tree had a mixed third quarter. The company's earnings per share fell to $0.58 from $0.68 in the previous year's quarter. Sales grew by 9.5%, while comps increased by 3.1% as both missed expectations by slight margins. The company lowered its guidance for the fourth quarter as it expects its comparable sales during the holiday season to be in the low single-digits. Now it expects fourth-quarter earnings in the range of $1.01-$1.07, whereas analysts' expectations stand at $1.10.

Final thoughts
The US retail industry is still struggling as it continues to battle tough economic conditions. Under these trying circumstances, Dollar General's performance isn't less-than-satisfactory. The company's third-quarter performance speaks for itself as earnings, sales, and comps grew at healthy paces.

Dollar General's strong outlook for fiscal 2014 and its plan to keep expanding its business prove that the company is on the right track. Financially, the company is sound and it looks to be undervalued with significant upside potential. Taking all this into account, I believe Dollar General presents a good investment opportunity at this point in time.

But what about the elephant in the retail room: Wal-Mart?
Dollar General and its peers have been chipping away at retail's old guard for year now, but does that mean they can take over the sector? To learn about two retailers with especially good prospects, take a look at The Motley Fool's special free report: "The Death of Wal-Mart: The Real Cash Kings Changing the Face of Retail." In it, you'll see how these two cash kings are able to consistently outperform and how they’re planning to ride the waves of retail's changing tide. You can access it by clicking here.

Zahid Waheed has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information