Dollar General: 27 Consecutive Years and Counting
publication date: Jun 2, 2017
author/source: Brian Nelson, CFA
The dollar store industry is one that often flies under the radar of many investors that are looking for more glamorous ideas. However, the often-counter recessionary trends of their businesses coupled with unit proliferation makes them worthy of consideration, in our view. We like Dollar General the most.
By Brian Nelson, CFA
We added discount retailer Dollar General (DG) to the Best Ideas Newsletter portfolio April 13, "…2 New Additions to the Best Ideas Newsletter Portfolio.” The 75+ year old company that offers everything from food and snacks to cleaning supplies and clothing has more than 13,300 stores in 40+ states. Despite its already massive store base and a retail environment that remains in flux, fiscal 2016 marked its 27th consecutive year of same-store sales growth, a truly remarkable achievement. During fiscal 2016, Dollar General opened 900 new units and refreshed or relocated another 900+ more, and the company is doing a lot of things right, as evidenced by a merchandising and marketing strategy that continues to deliver on its brand promise of everyday low prices. Grabbing market share with hopes that gross margin will eventually follow remains its mission, and the 1,290 new stores it expects to open and the 760 more it expects to remodel/relocate in fiscal 2017 speak to a company that is not backing down to industry pressures or from competition that runs the gamut in retail from Walmart (WMT) to Amazon (AMZN) and beyond.
The Best Ideas Newsletter portfolio holding’s first-quarter report, released June 1, had a lot in it that investors liked. During the period, Dollar General’s net sales advanced 6.5% thanks to 0.7% same-store sales growth, a nice gain over a very-difficult comparable last year, and the company upped its fiscal 2017 revenue guidance. First-quarter trends reflected an increase in the average transaction amount, which more than offset traffic headwinds, and consumables and apparel sales continue to perform better than home and seasonal categories. The gross profit margin did face 34 basis points of pressure on a year-over-year basis, in part due to higher markdowns, but this remains consistent with Dollar General’s market-share grab strategy. Higher labor costs weighed on SG&A a bit, but diluted earnings per share held the line thanks in part to buybacks, which helped to offset a much higher effective tax rate in the current-year’s quarter. Buybacks continue to remain an integral part of Dollar General’s capital allocation initiatives, with 1.3 million shares repurchased during the first quarter of 2017. “Since December 2011 through the end of the first quarter of 2017, the company has repurchased 75.6 million shares of its common stock at a total cost of $4.7 billion, at an average price of $61.57 per share (source: the company).” Dollar General opened 293 stores in the period.
Here’s what the company had to say about guidance for fiscal 2017:
…GAAP diluted EPS is forecasted to remain consistent with the prior guidance range of $4.25 to $4.50…the company's net sales are forecasted to increase by approximately five to seven percent as compared with the prior guidance range of four to six percent and capital expenditures for fiscal 2017 are expected to be in the range of $715 million to $765 million as compared with the prior guidance range of $650 million to $700 million. The Company's same-store sales growth is unchanged from the prior guidance range of slightly positive to an increase of two percent. Share repurchases for fiscal 2017 continue to be forecasted to be approximately $450 million. For fiscal 2017, assuming the closing of the acquisition as discussed above, the Company plans to open approximately 1,290 new stores in addition to remodeling or relocating 760 stores and to reduce the Company's total projects for remodels and relocations by 140 to allow for organizational capacity to execute the incremental new store growth anticipated to result from the pending acquisition.
Part of why we like Dollar General is its consistency of same-store sales expansion year after year, but the company is also a cash-flow generating powerhouse. During the first quarter, for example, cash flow from operations leapt to $510.5 million from $404 million in the year-ago period, and while capital spending jumped, too, we liked that free cash flow generation came in at $367 million during the quarter. Dollar General’s balance sheet reveals long-term obligations of $2.6 billion, but we’re not worried about the net debt position in light of cash flow performance being this strong. The magnitude of merchandise inventories on the books is the much bigger risk from our perspective, but we have no reason to believe Dollar General is not sourcing and moving product effectively to propel sales expansion. All things considered, we liked what we saw from the Best Ideas Newsletter portfolio holding, and its quarterly cash dividend of $0.26 per share is simply icing on the cake. At the time of this writing, the high end of our fair value range for Dollar General is $90 per share, below price highs set during the summer of last year.
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