FOOL PLATE SPECIAL
An Investment Opinion
Dollar General's Q3 Roll Call Brian Graney (TMF Panic)
November 9, 1999
Discount variety retailer Dollar General (NYSE: DG) turned in fiscal third-quarter earnings of $0.19 per share this morning, up from $0.15 a year ago and in line with the First Call mean estimate. Sales growth was a strong 21.6% for the period, continuing the 20%+ year-over-year sales growth trend started during the first two quarters of the year. Despite the growth, Dollar General's stock reacted this morning with about as much emotion as Gen. Thomas "Stonewall" Jackson at the First Battle of Manassas.
While still up 34% on the year, Dollar General's shares have slid 22% from their 52-week high in the past month as the company's same-store sales have slowed. Year-to-date, the retailer's same-store sales are up 7.4%, slower than the 11.4% pace recorded in the first three quarters of last year but matching the growth rate seen in 1997.
The lower comps are easier to swallow when the company's performance in other areas is considered. Gross margins in Q3 moved up to 29.24% from 28.76% a year ago, while net margins expanded to 5.35% from 5.16%. Ending inventory rose 16% sequentially, faster than the 4% rate of sequential sales growth but not out of whack considering the retailing industry's seasonal pre-holiday buildup at this time of year.
Unlike discount mega-retailer Wal-Mart (NYSE: WMT), which is looking abroad for its sales growth, Dollar General still has plenty of U.S. soil to claim in the years to come. The company opened a record 177 new stores in the quarter, bringing its total store count to 4,165 outlets.
Operating in the shadows of Wal-Mart's 94,000-square-foot discount centers and 181,200-square-foot Supercenters, Dollar General's 6,400-square-foot stores have carved out a niche for themselves by providing a low-priced stock of hard-line items such as detergents and beauty products to low- and moderate-income buyers. Located within three to five miles of most of its customers, Dollar General is able to attract customers who simply need to pick up a few items for a couple of dollars but don't want to deal with the hassle of piling the kids into the minivan for a full-blown Wal-Mart excursion.
The company is able to turn its inventory fairly quickly, but still has some room to get up to Wal-Mart standards. Aggregating cost of goods sold (COGS) for the past four quarters and dividing that figure by average ending inventory over the same period, Dollar General's turns comes in at 2.8, less than half Wal-Mart's stellar 6.3. The company may never be able to match Wal-Mart's much-heralded asset management abilities, but it's not a complete dog either.
Currently, Dollar General is matching the late Sam Walton's pride and joy in sales growth, earnings growth, and comps growth and beating the Arkansas giant in margins. Despite falling short in the asset management department, Dollar General's return on equity has bested Wal-Mart's performance during the past two years, even though the smaller retailer has used zero leverage to juice its results. While Wal-Mart's size and reach put it in a wholly different retailing league than Dollar General, there is also quite a gulf separating the two retailers' current valuations. With Dollar General trading at 24 times analysts' forward earnings estimates and Wal-Mart's shares changing hands at a forward multiple of 40, smart stock shoppers may want to take a closer look.