Is Dollar General Worth Your Dollars?

Dollar General (NYSE: DG  )  is among the few retailers which were able to post strong results during this season. Let's see how the company has been able to achieve these results and how it's performing in relation to its peers Big Lots (NYSE: BIG  ) and Dollar Tree Stores  (NASDAQ: DLTR  ) .  

Fourth-quarter results
Earnings for Dollar General grew 4% year-over-year to $1.10 per share, beating analysts' expectations of $1.02 per share. The company identified three important factors that restricted sales; unfavorable climatic conditions, the aggressive promotional environment which prevailed throughout the holiday season, and reduced government assistance that hurt the spending of low-income consumers. Net sales during the quarter grew 6.8% to $4.49 billion, which fell slightly short of analysts' expectations of $4.62 billion. Same-store sales rose 1.3% primarily due to increases in customer traffic and the average transaction amount.

The gross margin shrank 58 basis points to 31.9% from 35.2% in the same quarter of last year. However, SG&A expenses for the company improved 14 basis points.

For fiscal 2013, Dollar General earned $3.20 per share, up 10% from the prior year. Sales grew 9.2% to a record high of $17.5 billion, while same-store sales increased by 3.3%.

What is Dollar General up to?
Since 2011, Dollar General has bought 33.8 million of its common stock worth $1.7 billion. During the fourth quarter, it bought $200 million of common stock. For the current quarter, the company plans to buy another $200 million of common stock, which will bring its buyback authorization to $824 million.

Over the last few quarters, Dollar General has taken several measures to reduce its operating costs. The company has eliminated several less-productive, higher-cost items from its shelves, mainly in the health and beauty care segments, as these high-priced items don't sell that well. Dollar General has also introduced a new stocking program which keeps track of productivity levels across its stores. Store managers will continue to benefit from the "work management system," which assists them in prioritizing and managing their work. Apart from this, the company plans to introduce many work-elimination initiatives in order to streamline work at its stores. On the whole, all these efforts will improve the company's inventory management and help it reduce its day-to-day costs.

According to Bloomberg, Fred's, the regional discount chain, has approached CVS Caremark, Walgreen and Dollar General in regard to a buyout. Fred's pharmacy customers in rural areas are extremely loyal, which is why buyers are interested in buying the discount chain's stores, said Dutch Fox, an analyst at Friedman Billings Ramsey. Though Fred's low operating margins are an issue, buying Fred's stores would mean that Dollar General wouldn't have to do a lot to expand its pharmacy business.

In the current quarter, Dollar General expects per-share earnings of $0.72-$0.74 with 2%-3% growth in same-store sales. For the full year, the retailer anticipates earnings of $3.45-$3.55 per share, which is below the consensus estimate reported by Reuters of $3.69 per share; the analysts expect comps to increase by 3%-4%.

Industry peers
Recently, Big Lots' per-share earnings fell 30% year-over-year to $0.98. Sales also declined 6.2% to $1.64 billion. The bulk discount retailer is striving to revamp its business since it has been suffering from a slowdown in earnings during the last few quarters. The company's abortive attempts to return to profitability in the Canadian market prompted it to cease its operations in the region. In an effort to boost its retail sales, the company is adding more and more freezers and coolers to its stores. Additionally, it has also started to offer furniture financing which it believes will spur sales in the days to come.

Dollar Tree posted a slip in its latest quarterly net income on account of its dwindling sales. Net profit for the quarter decreased 6.8% to $213 million, down from $228.6 million in the year-ago quarter. Although EPS edged up to $1.02 from $1.01 last year, this missed analysts' estimates of $1.05 per share. Same-store sales for the quarter grew merely 1.2%, which fell short of the 1.6% predicted by Retail Metrics. The company is expanding its merchandise selection by adding private-label brands and frozen foods to its stores. Moreover, it has also started to accept food stamps.

Final thoughts
Dollar General's fourth-quarter results encouraged investors, as its earnings and sales continued to increase. However, the gross margin declined slightly, in a point of concern for the company. Nevertheless, Dollar General's decision to eliminate high-cost products will ensure that the retailer increases its profitability this year. Further, the work elimination initiatives and the "work management system" will streamline the company's day-to-day operations, which will result in more productivity. If the company manages to buy some of Fred's stores, its pharmacy business will grow exponentially.

Considering all the aspects discussed above, I believe Dollar General is a good investment choice at this point in time.

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