Is Dollar General Set to Soar Following Earnings?

Source: Wikimedia Commons

With Dollar General (NYSE: DG  ) due to report revenue and earnings for the first quarter of its 2014 fiscal year on June 3, 2014 , investors are probably contemplating what to do about the company's shares. Given the huge run-up over the past five years, will this quarter signal that other discount retailers like Family Dollar Stores  (NYSE: FDO  ) or Dollar Tree Stores  (NASDAQ: DLTR  ) are better prospects, or does Dollar General still have what it takes to add value to your portfolio?

Mr. Market is cautiously optimistic about Dollar General
For the quarter, Dollar General is expected to report revenue of $4.56 billion. If this forecast comes to fruition, it will represent an 8% rise in sales compared to the $4.23 billion management reported for the same quarter a year ago. It's difficult to tell how much of this growth will be due to an increased store count and higher comparable-store sales, but given the company's history of strong performance in each measure, it's unlikely that revenue will rise from just one factor alone.

Source: Dollar General

From an earnings perspective, Mr. Market is still optimistic but not to the same degree. For the quarter, analysts expect Dollar General to report earnings per share of $0.73, just 3% higher than the $0.71 management recorded during the first quarter of 2013. If this earnings forecast turns out to be accurate, it will likely be attributable to the company's higher sales and lower share count offset by rising costs.

But how does Dollar General match up against its rivals?
The past few years have been exceedingly kind to Dollar General and its shareholders. Between 2009 and 2013, the retailer saw its sales jump 48% from $11.8 billion to $17.5 billion. This has been, for the most part, due to an impressive 32% aggregate increase in comparable-store sales over this time frame complemented by a 26% jump in store count from 8,828 locations to 11,132.

DG Revenue (Annual) Chart

Dollar General revenue (annual) data by YCharts

Investors should keep in mind, however, that Dollar General hasn't been the only success story lately. During this same five-year period, Family Dollar saw its revenue climb 40% from $7.4 billion to $10.4 billion, while Dollar Tree's 50% jump in sales from $5.2 billion to $7.8 billion blew away the competition. Like Dollar General, both retailers enjoyed tremendous growth because of higher store counts and improved comparable-store sales.

In the case of Family Dollar, management reported a 24% jump in aggregate comparable-store sales, while the company's store count rose 19% from 6,655 locations in 2009 to 7,916 by year-end 2013. Dollar Tree's metrics came out even stronger during this period, with aggregate comparable-store sales soaring 28% and store count increasing 31% from 3,806 locations to 4,992.

Looking at earnings, each company's performance has been even more impressive. Between 2009 and 2013, Dollar General's net income jumped 202% from $339.4 million to $1 billion. This was due, in part, to the company's rising sales but can also be chalked up to its selling, general, and administrative expenses increasing at a slower rate than the company's revenue and interest expenses dropping from $345.6 million to $89 million.

DG Net Income (Annual) Chart

Dollar General net income (annual) data by YCharts

Unlike in the case of revenue, neither of Dollar General's peers can come close to matching the company's rise in profits over this five-year period. As sales increased and expenses fell in relation to sales, Family Dollar grew its net income 52% from $291.3 million to $443.6 million, while Dollar Tree's bottom line jumped 86% from $320.5 million to $596.7 million.

Foolish takeaway
Unfortunately, nobody knows for sure what the future holds (though if you know somebody who proves this statement wrong, let me know so I can take him/her to the casino a couple times to play the slots!). For this reason alone, the Foolish investor would be wise to avoid buying shares in Dollar General on the hopes that it can top forecasts this upcoming quarter.

Instead, the Foolish investor should see how Dollar General and its peers have fared over an extended period of time and answer the question of whether the company is likely to keep the trend going. Using the retailer's performance as an indicator of its strength, it's hard to argue against a stake in Dollar General, but it's also difficult to shoot down Family Dollar and Dollar Tree.

Top dividend stocks for the next decade
As great as Dollar General has done over the past few years, there is a downside to investing in the business: It doesn't sport a strong, stable dividend that has the potential to deliver amazing returns for the next decade or more!

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