Image Source: Mike Mozart
By Brian Nelson, CFA
Dollar General (DG) is a holding in the Best Ideas Newsletter portfolio. The company reported strong third-quarter results December 5 that showed better performance than rival Dollar Tree (DLTR). Discount retail continues to feel the ill-effects of tariffs that are raising cost of goods sold, but Dollar General is taking the headwinds in stride.
During its most recently reported quarter, Dollar General posted same-store sales growth of 4.6%, helping to drive overall net sales up nearly 9%. Operating profit advanced more than 11%, diluted earnings per share nearly 13%, and year-to-date operating cash flow nearly 10%, as the firm returned more than $480 million to shareholders through buybacks and dividends in the third quarter of the year. Here’s what Dollar General CEO Todd Vasos had to say about the quarter:
The quarter was highlighted by our best customer traffic and same-store sales increases in nearly five years, as well as double-digit growth in both operating profit and diluted EPS. We continue to execute well on many fronts, while maintaining our focus on delivering value and convenience for our customers. As a result of our performance through the first three quarters of 2019 and outlook for the fourth quarter, we are raising our full-year financial guidance as we work to finish a strong year.
Looking ahead to all of 2019, Dollar General expects net sales growth in the low 8% range (was ~8%), same-store growth in the mid-to-high 3% range (was low-to-mid 3% range), and adjusted operating profit expansion in of 7%-9% (was 6%-8%). Adjusted diluted earnings per share is now targeted in the range of $6.55-$6.65 for the year (was $6.45-$6.60). Next year, fiscal 2020, Dollar General plans to pursue 2,600 real estate projects, including 1,000 new store openings, 1,500 remodels, and 80 relocations. Vasos added in the quarterly press release:
We continue to see a significant number of opportunities to serve more customers and communities with our innovative mix of store formats. The sustained positive results we are seeing from our portfolio of real estate projects further validates our belief that our ongoing investment in high-return real estate projects, along with our strategic initiatives, is the best use of our capital as we look to continue delivering long-term shareholder value.
Unlike Dollar General’s rosy outlook, rival Dollar Tree is not doing as well. The firm’s third-quarter report, released November 26, showed a slower pace of same-store sales growth for both Dollar Tree and Family Dollar locations, and the company issued fourth-quarter sales and earnings-per-share guidance below consensus expectations.
Dollar Tree pointed to Section 301 tariffs as headwinds, among other considerations: “additional pressure on merchandise margin based on lower margin consumables growing faster than originally forecasted; payroll cost pressure in distribution centers, and increased run rates for repairs, maintenance, utilities, and depreciation.”
In addition to cost pressures, Dollar Tree’s management lowered its full-year fiscal 2019 revenue guidance to the range of $23.62-$23.74 billion compared to $23.57-$23.79 billion previously, and diluted earnings per share for the year is now targeted in the range of $4.66-$4.76 compared to $4.77-$5.07 previously. Shares of Dollar Tree tumbled aggressively after the lowered 2019 guidance so late into the year.
Concluding Thoughts
Retail continues to be a mixed bag. On one hand, there are department stores such as Kohl’s (KSS) and Macy’s (M) and many of their mall-based counterparts that are struggling. On the other hand, discount retail, namely Dollar General, is doing fine, despite some firm-specific issues at rival Dollar Tree.
Target (TGT), Walmart (WMT), and Best Buy (BBY) are also doing well. The consumer remains very strong with unemployment now at 3.5%, the lowest in decades, but we contend that a lot of the upside has already been priced in. All three are trading above our estimates of their respective intrinsic values.
As for our holding in Dollar General in the Best Ideas Newsletter portfolio, we’re going to continue to let shares run higher, despite its expensive valuation. Consistent with the Valuentum process, we’d only look to take profits in expensive shares when technicals start to roll over. We’re not seeing that with Dollar General yet.
Retail – Multiline: BIG, DG, DLTR, JWN, KSS, M, PSMT
Related: FIVE, RTH
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Brian Nelson 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.