Valuentum Exclusive Analysis for the Discerning Investor

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Image Source: Dollar General Corporation – Fiscal 2019 Annual Report and Fiscal 2020 Proxy Statement

By Callum Turcan

Dollar General Corporation (DG) is one of our favorite retail plays given its focus on smaller cities and towns (with populations of 20,000 or less) in the US as that gives it an immense edge over e-commerce giants such as Amazon Inc (AMZN) due to the logistical hurdles involved with expanding into these regions. Shares of DG have run up above the top end of our fair value range as of this writing.

However, given its strong technical and fundamental performance of late, we are keeping Dollar General as an idea in our Best Ideas Newsletter portfolio as we like to let our winners run. It isn’t until a company’s technicals turn against it that we consider removing shares from our newsletter portfolios. Shares of DG yield ~0.8% as of this writing, which offers incremental income upside to Dollar General’s capital appreciation upside.

In March 2020, Dollar General opened its first store in Wyoming which represented the 45th state the company had a retail presence in. In April 2020, Dollar General opened its first store in Washington state, growing its retail presence to 46 US states. Beyond same-store sales growth, Dollar General sees room for upside by expanding its physical store count.

Quarterly Overview

On May 28, Dollar General posted a stellar earnings report for the first quarter of fiscal 2020 (period ended May 1, 2020). Same-store sales rocketed higher by 21.7% year-over-year and GAAP net sales surged higher by 27.6% year-over-year, performance that looks even stronger when considering Dollar General’s GAAP gross margins rose by ~50 basis points year-over-year. This outperformance was led in part by the surge in consumer spending at retailers brought on by “panic buying” due to the ongoing coronavirus (‘COVID-19’) pandemic, but there is more to it than that.

Dollar General has invested heavily in bulking up its digital capabilities and adding more consumer staples offerings to its stores (including both prepackaged and fresh food options). We strongly appreciate the various initiatives management is pursuing to enhance Dollar General’s competitive edge and to augment the company’s long-term free cash flow growth trajectory.

Additionally, Dollar General reported strong demand across a whole slate of offerings as “same-store sales increased in each of the consumables, seasonal, home products and apparel categories, with the largest percentage increase in the home products category,” which we appreciate. Dollar General’s sales growth trajectory moderated slightly in April 2020 but remained strong, which we’ll cover in just a moment.

Economies of scale, managed operating expense growth and gross margin expansion led to Dollar General’s GAAP operating income rising by over 69% year-over-year which entailed the firm’s GAAP operating margin increasing by over 250 basis points year-over-year last fiscal quarter. SG&A expenses as a percent of total revenues declined by over 200 basis points year-over-year in the fiscal first quarter, highlighting Dollar General’s ability to keep costs tame even during harrowing times such as these. Here’s some key commentary from management during the retailer’s latest quarterly conference call (emphasis added):

“Turning now to our first quarter performance. The quarter was highlighted by extraordinary growth in both top and bottom-lines. These results reflect significant changes in shopping patterns which began in March as consumers reacted to the COVID-19 pandemic.

For the month of February, same-store sales increased 5.5% driven by broad based performance across many fronts, which we believe speaks to the continued strength and sustained momentum of the underlying business.

Beginning in the March, we experienced a significant surge in demand and sales as consumers began to stock up and category mix shifted even more than usual to our consumable category. For the month in total, comp sales increased 34.5%.

April sales moderated in comparison to March, but remained elevatedas consumers continue to replenish household essentials at a rate greater than normal. During April, we also experienced significant growth in our non-consumable businesses and our three non-consumable categories delivered a combined comp sales increase in excess of our consumable business. For the month in total, same-store sales increased 21.5%.” --- Todd Vasos, CEO of Dollar General

Due in part to very favorable working capital movements, Dollar General’s free cash flows clocked in north of $1.5 billion last fiscal quarter. That easily covered $0.1 billion in common dividend obligations and a bit less than $0.1 billion in share repurchases during this period. Dollar General exited the fiscal first quarter with $2.7 billion in cash and cash equivalents on hand versus a negligible amount of short-term debt and $4.0 billion in long-term debt. We view Dollar General’s net debt load as very manageable given the firm’s high quality cash flow profile and very sizable free cash flows of late.

Concluding Thoughts

We continue to like Dollar General as an idea in our Best Ideas Newsletter portfolio and it appears the company’s growth trajectory is improving materially. The level of same-store sales growth seen in March 2020 is unlikely to be sustainable; however, Dollar General’s various initiatives (improvements to its digital ecosystem, greater in-store consumer staples offerings, expanding into new US states) seem to be paying off, and we remain impressed with its operational and financial performance of late.

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Dollar Store and Department Store Industries – KSS M JWN BIG DG DLTR PSMT

Specialty Retailers Industry – AAN BBBY BBY GME HD LOW LL ODP SHW TSCO WSM

Food Retailing Industry – CASY COST CVS KR SYY TGT WBA WMT

Related: AMZN, CBRL, SPY

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Callum Turcan does not own shares in any of the securities mentioned above. Cracker Barrel Old Country Store Inc (CBRL) is included in Valuentum’s simulated Dividend Growth Newsletter portfolio. Dollar General Corporation (DG) is included in Valuentum’s simulated Best Ideas 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.