Dollar stores like Dollar General (DG +2.64%) and Dollar Tree Stores (DLTR +4.03%) have some very solid tailwinds working in their favor. The economic underpinnings of the deep-discount retail space are favorable. Consumer spending rose slightly last month, according to the U.S. Department of Commerce, signaling good things for retailers more broadly. And, since consumers continue to scale down spending habits in light of the inconsistent economic recovery in the United States, dollar stores should enjoy some strong momentum.
Interestingly, shares of Dollar General lost 7% of their value on Friday, June 27 after the company's Chairman and Chief Executive Officer Rick Dreiling announced he will retire next year. Which of course begs the question: was the drop, which amounted to a total of $1.3 Billion dollars, warranted?
Dollar General's underlying business is performing well. It's reporting growth and expanding its store count. Plus, it rewards shareholders with a significant share- buyback plan. It made little sense for the stock to drop so much on news that the CEO will retire a year from now.As a result, it seems investors are needlessly panicking.
Dollar General is doing just fine
Last quarter, Dollar General posted a 1.5% increase in same-store sales, which measure sales at locations open for at least one year. Total sales rose 6.8%, reflecting management's commitment to expanding the store count. Earnings per share rose 7%. And, digging deeper, Dollar General performed very well across several key metrics for a retailer.
For example, both customer traffic and the average transaction size grew last quarter. Management noted that momentum accelerated toward the end of the quarter, implying a sense of optimism in the current quarter as well. For the full year, management reiterated its expectations for 8%-9% net sales growth and 3%-4% same-store sales growth.
Dollar Tree is also excelling in the currently favorable environment. Dollar Tree posted record first-quarter results. In all, its same-store sales growth clocked in at 2%; it also reported 7% growth in net sales.
To reward shareholders, Dollar General management maintains an aggressive share-buyback program. The company bought back $800 million worth of shares just last quarter and has $223 million of repurchases left in its current authorization. Given its solid cash generation, it's a good bet Dollar General will announce a new authorization when the current one ends.
It seems that investors panicked on the news that Dollar General's CEO would retire based on what that might mean for possible merger activity with struggling dollar store Family Dollar Stores (FDO +0.00%).
As you might recall, noted activist investor Carl Icahn recently took a 9% stake in Family Dollar. In response to Family Dollar's poor financial performance, including a 3.8% decline in same-store sales last quarter, Icahn made an investment and will reportedly pursue board seats as well as strategic changes.
The most prominent change Icahn wants is for the company to sell itself to a larger rival, more specifically -- Dollar General.
Dollar General has yet to formally announce any plans whatsoever to acquire Family Dollar, but it appears investors were expecting a deal based on Dollar General's stock drop. Either that or investors are panicking on news of the CEO's impending departure. In either case, there's little need to panic.
Dollar General will carry on
Dollar General lost 7% of its value on an otherwise up day for the markets just because its CEO announced he would retire a year from now. This was a curious drop to say the least, especially considering how well Dollar General is doing right now. It's growing sales and profits and buying back boatloads of stock.
In addition, Dollar General isn't an expensive stock, making its big decline even more confusing. Dollar General trades for just 17 times trailing earnings and 14 times forward earnings per share, multiples that are lower than the broader market holds.
As a result, there's little need to sell Dollar General just because the CEO plans to retire. Dollar General will be just fine.
