Dollar General (DG +2.71%) has a business model that seems to confuse many investors.
The company has expanded rapidly by meeting a specific need in the communities it serves for nearby stores that sell basic necessities at low prices. Its locations are profitable, but that profitability has a ceiling due both to the nature and pricing of the merchandise, and the fact that these are primarily neighborhood stores.
A consumer may travel significantly further to shop at a Target (TGT +3.17%) or Wal-Mart (WMT +2.15%), because those chains sell big-ticket items, and lower-priced ones in vast varieties. Dollar General does not. Instead it offers a smaller selection of foods, household goods, and other supermarket basics at very low prices. It's not a dollar store in the sense of strict adherence to the "everything for a buck or less" concept, but its take on discounting has proven resilient at a time when other types of retail are losing ground to digital rivals.
Dollar General isn't sexy. The chain does not chase new categories, and it's not a "destination" store. However, its success in its established niche gives the company tremendous opportunity to add more stores. And while those stores won't post significant year-over-year growth once they come up to speed, they will be profitable.
Image source: YCharts.
What is Dollar General doing?
In the first quarter, the company delivered what have, for it, become fairly typical results. Net sales grew by 6.5% while same-store sales were up 0.7%. And earnings per share of $1.02 were almost exactly the same as a year ago, when they came in at $1.03.
During Q1, Dollar General opened 293 new stores and remodeled or relocated 301. In 2016, the company added 900 new locations, and says it plans to add another 1,290 in 2017.
The retailer pays a quarterly cash dividend; its next payout will be on July 25, for $0.26 a share -- up from the $0.25 a share it distributed in the previous four quarters. In addition, the company has been buying back shares; it spent $89 million doing that in Q1. The chain has a further $845 million in share buyback authorization, with no expiration date.
The company expects to deliver a full-year EPS of between $4.25 and $4.50. It also expects same-store sales growth for 2017 to be between marginal and 2%.
Dollar General expects to open nearly 1,300 new locations in 2017. Image source: Dollar General.
It's slow and steady
Dollar General has more protection from losing sales to e-commerce sites than Target and Wal-Mart because of what it sells, and where. It offers convenience and immediacy for items that consumers probably don't want to wait to get.
Due to the size of its stores, Dollar General also has an edge over its big box rivals. Both Wal-Mart and Target are working to make it easier for customers to patronize them for quick shopping trips, doing everything from putting grab-and-go items near the front to offering curbside pickup. That may help, but it's not going to equal the convenience of walking into a smaller store that's close to your home.
Dollar General has a niche. It's a modern take on a grocery store/limited supermarket. It knows how to scout locations, and it has shown it can open new stores at a rapid clip, and bring them up to profitability fast.
This is not a stock to judge on same-store sales growth. Investors should instead focus on its ability to add new stores, and to remain profitable by serving a market that's it's unlikely to lose to e-commerce any time soon.
