Valuentum Exclusive Analysis for the Discerning Investor

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Image Source: Dollar General Corporation – Fiscal 2020 Annual Report

By Callum Turcan

On May 27, Dollar General Corporation (DG) reported first-quarter earnings for fiscal 2021 (period ended April 30, 2021) that smashed past consensus top- and bottom-line estimates. The company raised its full year guidance for fiscal 2021 in conjunction with its latest earnings report. We continue to be big fans of Dollar General and include shares of DG as an idea in the Best Ideas Newsletter portfolio.

Dollar General is a discount retailer that is focused on catering to small cities and towns in the US with populations of 20,000 or less. These are regions where e-commerce operations with a home delivery component have historically had a difficult time meeting customer demand in an economical manner. The discount retailer’s business model has so far proven to be resilient in the face of the proliferation of e-commerce, and we expect that will continue being the case in the coming years. 

Earnings Update

The frantic “pantry stockpiling” dynamic that took place last year in the wake of the initial phases of the coronavirus (‘COVID-19’) pandemic saw revenues at retailers with significant consumer staples offerings like Dollar General swell higher. Year-over-year comparisons are noisy for this reason. Though Dollar General’s same-store sales declined by 4.6% year-over-year in the fiscal first quarter, its same-store sales grew by 17.1% on a two-year stack basis (sum of the percentage change in the first quarter of fiscal 2020 and the first quarter of fiscal 2021). The discount retailer noted that while foot traffic was down year-over-year at its stores last fiscal quarter, the average transaction size was up during this period.

Breaking Dollar General’s sales performance down by product category tells a better picture. Dollar General’s ‘consumables’ sales were down just under 5% year-over-year last fiscal quarter, but its ‘seasonal,’ ‘home products,’ and ‘apparel’ sales were all up double-digits year-over-year. Non-consumable product sales (generally speaking) carry stronger margins than consumable product sales (according to Dollar General).

Dollar General’s GAAP revenues fell by 1% year-over-year though its GAAP operating income rose 5% year-over-year in the fiscal first quarter. Strong underlying demand for Dollar General’s offerings along with various margin enhancing initiatives (such as growing its non-consumable product sales) helped grow its GAAP gross margins by almost 210 basis points last fiscal quarter versus year-ago levels. The firm noted that pricing strength, reduced promotional pricing activity, reduced inventory shrinkage, and growth at its non-consumable product sales more than offset headwinds arising from higher logistics costs last fiscal quarter (as it concerns its gross margin performance).

The discount retailer’s GAAP operating margin expanded over 55 basis points year-over-year last fiscal quarter, as stronger gross margins contended with rising operating expenses. Some of the operating expense pressure had to deal with the firm investing in health and safety measures to handle the COVID-19 pandemic, expenses that should eventually roll off in the future as the public health crisis is brought under control via ongoing vaccination efforts. Higher labor costs were also cited as a headwind, though that was partially the result of employee appreciation bonuses.

Strong Financials

In the first quarter of fiscal 2021, Dollar General generated over $0.4 billion in free cash flow and spent $0.1 billion covering its dividend obligations. Though its free cash flows dropped year-over-year, this was primarily due to the panic stockpiling effect and the related favorable working capital movements Dollar General benefited from in the same quarter in fiscal 2020.

The firm spent $1.0 billion buying back its stock last fiscal quarter. In conjunction with its latest earnings report, Dollar General raised its targeted share buybacks for fiscal 2021 up to $2.2 billion from $1.8 billion previously. Our fair value estimate for Dollar General sits at $222 per share with room for upside, and we see buybacks (in moderation) as a good use of capital, though the firm needs to be cognizant of its balance sheet strength.

At the end of the fiscal first quarter, Dollar General had a net debt position of $3.4 billion (with no short-term debt on the books) and ample liquidity on hand. We caution that Dollar General also has sizable operating lease liabilities on the books. Given its impressive free cash flow generating abilities and promising outlook, we view Dollar General’s non-cancelable liabilities as manageable, however.

Dollar General raised its net sales guidance for fiscal 2021 up to +/- 1% from -2% to 0% previously, as the firm reduced the expected decline in its same-store sales this fiscal year. Additionally, Dollar General raised its diluted EPS guidance for fiscal 2021 up to $9.50-$10.20 versus $8.80-$9.50 previously. The discount retailer kept its capital expenditure guidance for fiscal 2021 flat at $1.05-$1.15 billion. We appreciate Dollar General’s confidence in its near-term performance.

Concluding Thoughts

Shares of DG moved comfortably higher during normal trading hours on May 27 as investors appreciated Dollar General’s latest updates, as did we. As of this writing, shares of DG yield a modest ~0.8% as the company has historically prioritized growth investments and share repurchases over its dividend. Dollar General’s capital appreciation upside is substantial, in our view, as the top end of our fair value estimate range sits at $266 per share.

The discount retailer is well-positioned for the reopening of the US economy. Dollar General’s growth outlook is bright as its store count continues to steadily grow, and we are intrigued by its new store concept pOpshelf and the potential upside its larger namesake store formats could generate. We continue to like Dollar General as an idea in the Best Ideas Newsletter portfolio.

Downloads

Dollar General's 16-page Stock Report (pdf) >>

Dollar General's Dividend Report (pdf) >>

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Callum Turcan does not own shares in any of the securities mentioned above. Chipotle Mexican Grill Inc (CMG), Dollar General Corporation (DG), Domino’s Pizza Inc (DPZ) and The Walt Disney Company (DIS) are all included in Valuentum’s simulated Best Ideas Newsletter portfolio. Dick’s Sporting Goods Inc (DKS) and Home Depot Inc (HD) are both included in Valuentum’s simulated Dividend Growth Newsletter portfolio. Some of the other companies written about in this article may be included in Valuentum's simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.