An Opportunity Not To Be Missed – This Company Is Right On Track!
Himanshu is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Amidst the problems of an uncertain economy with rising unemployment, sovereign debt crisis, cost inflation, and shrinking budgets of consumers; all companies are facing difficulties in attracting customers and lure them to their stores. Companies do not have any option but to increase their promotional spending or offer discounts to instigate sales, hurting margins in the process. Hence, they are in a deadlock.
However, there are companies who benefit from such circumstances and always manage to rise above the others. As discussed in my recent article, the discount retailers tend to benefit from such consumer sentiments and if you own any of those jewels, they will make your portfolio shine. One of them is Dollar General (NYSE: DG), which has again posted a quarter that beat market expectations and delighted investors. If you would have owned the stock at the beginning of the year, you would have earned an amazing 25% on your investment in this choppy market.
The Retailer Did It Again…
After four consecutive quarters of remarkable revenue increases, the retailer did it again with a increase of 10.4%, clocking $3.95 billion. Adjusted earnings jumped 33% to 69 cents a share as compared to prior year’s quarter. The results were driven by increased customer traffic in its stores and higher purchases in each visit of the customers. All thanks to the retailer’s strategy of offering everyday low prices which includes most items for $10. This enables the customers to shop more while spending each penny judiciously.
A point which works in favor of the discount retailer and also makes it different from its peers is the fact that it along with offering low prices its stores are smaller, making it easier for customers to navigate. Also, since the stores do not require much space such as stores of Wal-Mart (NYSE: WMT) do, it can be opened closer to the customers making it more accessible to them.
This also enables Dollar General to have lower costs attached to the smaller format stores as against retailers such as Wal-Mart which are suffering under the pressure of huge costs related to its conventional large stores. Even Wal-Mart is now intending to switch to smaller stores which can be opened in customers’ neighborhood so that shoppers can easily drop in for their daily requirements.
Dollar General witnessed an amazing quarter in terms of its segmental performance. All four segments witnessed stellar growth over last year with the highest growth of 12% coming in for its largest Consumables segment. The segment makes 75% of the retailer’s revenue and was largely driven by its expansion efforts in the snacks and perishable foods category.
New Store Spree
Dollar General has been growing gigantically, but this growth is not limited to the volumes of sales only. It is also growing in terms of its geographical presence and store count. The retailer plans to open 625 stores this year of which it has already opened 295. Moreover, it has been remodeling its stores to keep the customers’ interests intact. These new stores are also actively contributing to grow its top line.
However, even the old stores are not left behind in performance terms. This is adequately reflected in the retailer’s same store sales growth which stood at 5.1% for the quarter. The metric highlights the remarkable performance of the company as compared to its industry peers. In the recent quarter, Wal-Mart had registered a 2.2% growth in the metric whereas arch rival Dollar Tree (NASDAQ: DLTR) was at 4.5%.
Valuation
Going by the numbers, Dollar General has a trailing P/E multiple of 21.37 which is higher than its peers Dollar Tree and Family Dollar (NYSE: FDO) which are at 21.21 and 17.85 respectively. This reflects that the company is slightly expensive than its industry peers. But considering forward P/E multiple shows that analysts feel that the company has great growth prospects. Dollar General’s forward P/E of 15.49 is quite lower than the trailing P/E multiple, highlighting the fact that it is expected to grow impressively giving investors great results.
Also, its PEG ratio of 1.02 is lower than its peers Dollar Tree and Family Dollar which have the metric at 1.12 and 1.24 respectively. PEG ratio is an important metric since it indicates the pace of growth of a company and should be lower. Hence, Dollar General’s lower PEG ratio confirms that the company is expected to grow faster than its peers. Hence, even if the company is expensive (due to higher trailing P/E multiple) it is justified since it is expected to provide greater value to its investors.
Bottom Line
The discount retail industry has been doing really well, especially since the start of recessionary period since customers move out to cheaper options for their daily requirements. This reason itself makes the industry increasingly attractive given the prevailing circumstances. Moreover, Dollar General in particular has been a sparkling player among the lot given its strong performance each time. Its smaller stores have been a strong weapon in its arsenal and its continuous store expansion make its prospects even better.
Dollar General’s attractiveness grows when we look at it in comparison with its peers. Analysts’ estimates of the retailer growing fast and enormously in future makes it even more luring. An investor who looks for a long term safe investment should definitely pick this one.
justhimanshu has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
