With its share price up by around 5% over the last 12 months, Dollar General (DG 0.52%) is one of the few companies that escaped the 2022 bear market largely unscathed. The company's recession-resistant business model and compelling competitive advantages can help it maintain market-beating momentum. Let's dig deeper.
Built for the difficult times
Founded in 1939, Dollar General operates a chain of deep discount stores primarily located in underserved communities like inner cities and rural towns. The company keeps its products at rock-bottom prices by placing its stores in areas where land and labor are cheap, offering a no-frills shopping experience, and stocking its own private-label products, which are often cheaper imitations of national brands. With macroeconomic uncertainties mounting, this business model may come in handy.
According to a poll of economists conducted by Bloomberg in December, 70% expect the U.S. economy to enter a recession in 2023 as challenges like rising rates and high inflation eat into consumer spending.
Image source: Getty Images.
For a discount retailer like Dollar General, an economic downturn could be an opportunity instead of a threat. When money is tight, consumers are more likely to ditch pricier retailers like Amazon's Whole Foods in favor of cheaper alternatives like Dollar General.
The company is already enjoying some of these tailwinds. According to management, consumers earning $100,000 per year are helping drive growth as a challenge like inflation bites into their spending power.
Respectable growth
With around 80 years of history, Dollar General is a relatively mature company in an arguably boring industry, so investors shouldn't expect lighting-fast growth.
That said, the company is far from stagnant. Third-quarter sales jumped by 11% to $9.5 billion, driven by healthy same-store sales growth and the rollout of new locations. The company added 227 new stores in the quarter, bringing its total to 18,566.
Right now, Dollar General's growth strategy mainly hinges on doing the same things that made it successful for decades: keeping costs low and opening new stores in the right markets. But management is also making an exciting new push into something different: healthcare.
With stores located in out-of-the-way rural ZIP codes, Dollar General has a big physical footprint in what its management calls "healthcare deserts" -- areas where people lack basic medical-related services within a reasonable distance. Former CEO Todd Vasos believed that 65% of Dollar General stores are in such areas. And under his leadership, the company hired a chief medical officer to oversee the possible rollout of healthcare-related products and services.
While it is still unclear how big this business will eventually be, Dollar General could be on its way to disrupting the $349 billion U.S. drugstore market. Its unique geographic footprint and skill at keeping costs low could become significant competitive advantages.
An eye on the valuation
With a price-to-earnings (P/E) multiple of 19, Dollar General's stock is slightly cheaper than the S&P 500 average of 21. That said, shares look like a good deal, considering its safe business model and potential for long-term expansion in the healthcare industry. Management sweetens the deal with a modest dividend (yield of 0.94%) and share repurchases, which retired $546 million worth of stock in the third quarter.
