Dollar General’s fiscal 2017 marked its 28th consecutive year of positive same-store sales growth, and we couldn’t be more impressed with the consistency of its operational performance in the past three decades, as well as its share price performance since its addition to the simulated Best Ideas Newsletter portfolio.
By Kris Rosemann
Dollar General’s (DG) fiscal 2017 fourth quarter report, released before the open March 15, was full of reasons for investors to get excited, and its share price reacted accordingly. The company has been a model of consistency for nearly three decades, and it continues to have a significant runway for growth while simultaneously generating an attractive and growing free cash flow stream.
Same-store sales grew 3.3% in the quarter on a year-over-year basis, capping off the company’s 28th consecutive year of positive same-store sales growth, as a slight decline in traffic was more than offset by an advance in average transaction amount. Full-year same-store sales growth was 2.7%, and the discount retailer also opened a company record 1,315 new stores in fiscal year 2017 in accordance with its robust store count growth plans.
Dollar General’s gross margin advanced nicely in the fourth quarter of fiscal 2017, climbing to 32.1% from 31.6% in the year-ago period as negative mix shift was more than offset by higher initial inventory markups, improved inventory management, and lower markdowns. SG&A expenses rose nearly 160 basis points in the quarter from the comparable period of fiscal 2016 as a result of higher occupancy and labor costs. Diluted earnings per share, excluding the re-measurement of deferred tax assets and liabilities, came in at $1.48 in the fiscal fourth quarter, down slightly from diluted earnings per share of $1.49 in the year-ago period, and the full year measure of $4.49 was slightly ahead of fiscal 2016’s $4.43.
Despite the relative flat bottom-line performance, Dollar General’s cash flow from operations advanced more than 12% in fiscal 2017 over fiscal 2016 levels, and free cash flow increased 10.6% to nearly $1.2 billion despite more than 15% growth in capital spending related to its store count growth. Such strong free cash flow generation has allowed the firm to reduce its net debt position to ~$2.7 billion at the end of fiscal 2017 from ~$3 billion a year earlier while continuing its robust growth plan and returning $863 million in capital to shareholders via dividends and buybacks. Annual cash dividend obligations ran at ~$283 million in fiscal 2017, and management announced a 12% increase in its quarterly dividend to $0.29 per share.
Looking ahead to fiscal 2018, Dollar General expects net sales growth of ~9% and same-store sales growth to be in the mid-2% range. Its operating margin is projected to be roughly unchanged from fiscal 2017 at 8.55%, but diluted earnings per share are expected to leap to a range of $5.95-$6.15. Management expects to grow its capital spending in fiscal 2018 to a range of $725-$800 million from $646 in fiscal 2017 as it plans to open ~900 new stores, remodel 1,000 stores, and relocate 100 stores.
All things considered, we continue to love Dollar General’s recession resistant business. Its consistency is simply incredible, and its ability to continue throwing off excess cash while executing its robust growth plan is similarly impressive. Such cash flow generation puts our minds at ease when it comes to its debt load (net debt-to-EBITDA remains reasonable at ~1.1x), and management clearly has confidence in its future trajectory of free cash flows as it hike the quarterly dividend and authorized an additional $1 billion for its share repurchase program. Shares have had a tremendous trip since we first highlighted the idea in the simulated Best Ideas Newsletter in April 2017 at $68.83 to current levels in the mid-90s, and we hope our members have enjoyed watching the run of this well-timed idea as we have.
Retail – Discount: BIG, DG, DLTR, FRED, PSMT
Related ETFs: XLY, XRT, VCR, RTH, RETL, FDIS, FXD, IYC, EMTY, SCC, RCD, UCC, PMR, CNDF, FTXD, JHMC
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Kris Rosemann does not own shares in any of the securities mentioned above. Some of the companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.