Stretching dollars has never been more important. While congress dithered over whether people should get another coronavirus stimulus check while states were forcing businesses to close or operate at less than capacity, consumers suffer to make ends meet.
The situation has clarified just how important the dollar store chains are to American consumers, and perhaps none more so than Dollar General (DG +0.75%), the leading deep discount retailer.
Yet its stock jumped over 34% in 2020 as many investors saw the value proposition inherent in its positioning, which raises the question of whether Dollar General can still be a millionaire-maker stock.
Image source: Dollar General.
Know your customer
Dollar General is the largest deep discount chain operating almost 17,000 stores at the end of October compared to over 15,200 by primary competitor Dollar Tree (DLTR +0.34%). It also has an enviable record of posting 30 consecutive years of comparable-store sales gains, and there's no reason to think it won't notch its 31st when it finally reports fourth quarter results.
For a chain with such massive sprawl to keep having customers come back again and again is a feat few other retailers of not even a similar size could hope to achieve.
It's been able to earn such loyalty from its customers because it understands them well. It locates its small-box stores in rural, suburban, and urban communities nearest to its core customer of low- and fixed-income residents who are all too often underserved by other, bigger retailers.
By focusing its product selection on quality name brands, and offering them at everyday low prices that are competitive with even the largest discount retailers like Walmart (WMT 1.51%) and Target (TGT 1.06%), it has carved out a niche for itself that's proven attractive to both consumers and investors.
Give them what they want
It's been a long time since dollar stores actually sold goods for just a dollar, though Dollar Tree continues to be unique in that manner, but even it is expanding its selection of higher priced goods.
What it learned from Dollar General was that customers still appreciate, and will respond to higher prices so long as the perceived value is still good. Most of Dollar General's prices are $10 or less, and though it sells home goods, apparel, and seasonal items, consumables are its primary focus, accounting for 78% of total sales.
Yet these also tend to be the lowest margin items, especially free produce, which has become a distinction for Dollar General among its competitors. Its DG Fresh initiative, a self-distribution model for fresh and frozen products, is designed to help boost sales and lower costs while ensuring it has enough product in stock. Even so, the discounter's profits surged 57% from last year in the third quarter.
Dollar General continues to expand into new markets and announced plans to open over 1,000 new stores in 2021, while renovating another 1,750 and relocating an additional 100 stores.
Is the stock a good value as the stores?
At 21 times next year's estimated earnings and 20 times the free cash flow it produces Dollar General's stock isn't a deep discount but it is a fair value for the potential it provides investors.
It offers a stable business model that is producing robust growth as its offerings resonate to keep consumers coming back. Despite its large existing footprint, the retailer still has plenty of markets to grow into and the conditions that have made it such a success this past year (let alone years past) unfortunately seem as though they will exist well into the future.
Even if conditions markedly improve, Dollar General will have developed renewed bonds of loyalty with its customers that it should be a millionaire-making stock for investors.
