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Dollar General (NYSE: DG ) appears to have exposure to both the short-term headwinds that face the vast majority of retail operations along with the long-run trends that bode well for investors. Winter weather -- the most common phrase on the lips of retail executives these days -- kept recent financial results limited and urged management to issue cautious forward guidance, but the company is seeing some great traction in new offerings: tobacco and frozen foods. Dollar General and its discount-retail brethren had a great run during the depths of the recession, but things aren't going as well now, even while the majority of consumers still exercise tremendous caution in their everyday spending. Where should investors stand with Dollar General?
Unlike many a retailer in the last three or four months, Dollar General is still posting positive figures for sales and earnings, but it's a much different story from prior periods' delectable numbers. In its fiscal fourth quarter, the company grew sales 6.8% to a whopping $4.49 billion. Despite its already large retail footprint, this is a fast-growing business on the top line due to extreme store growth. Throughout 2013, Dollar General added 550 new stores to its 11,000-plus.
Store growth is an attractive use of capital as long as the company has an attractive ROIC on the investments. In prior periods, that was certainly the case. In the fourth quarter, though, same-store sales crept up 1.3%. While it's not a comfortable figure, investors should note that the increase came from organic gains in both traffic and average transaction amount.
Margins are shrinking a bit, which is to be expected as Dollar General has recently gotten into the tobacco game -- a great growth opportunity but a lower-margin good for the company.
All in all, earnings grew from $0.97 to $1.01 per share, reflecting the overall sluggish growth in the quarter.
What to expect in the periods ahead
There are a couple of things to keep in mind here, both internally and externally. Starting at the view from the top, Dollar General and the deep discounters are in a bit of a pickle. During the Great Recession, everybody outside of the ultra-wealthy was hurting. This brought new customers that would normally be at middle-market supermarkets to Dollar General for the extra savings, in addition to its core demographic. As the economy recovers, the first groups to feel relief are the ones closest to the top. So, many of the transient customers that were in the stores a few years ago have returned to some form of normal economic condition and altered their shopping habits accordingly.
This leaves the core demographic: low-to-middle-income folk. Sadly, this is the last group to recover (if ever) and the most cautious to spend. Without a full economic recovery that embraces all socioeconomic classes, Dollar General is stuck in a sort of limbo along with its customer base.
Macro events aside, the company is set up to grow comfortably in the long term. This year alone, Dollar General is tacking on 700 new stores. If the longer-term ROIC holds up going forward, investors are looking at great growth on both the top and bottom lines.
At under 14 times earnings, investors would be getting a great deal today on anything better than the past quarter's performance. Dollar General should return to more stable operations in the next couple of years, with the added benefit of its tobacco business and expanded perishable offerings. As is the story with most retail businesses, same-store sales will dictate the ultimate performance of this growth-minded discount retailer. The odds look good.
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