Should This General Be Commanding Investors’ Portfolios?

By Ryan Guenette - September 13, 2012 | Tickers: COST, DG, DLTR, FDO, TGT | 0 Comments

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The dollar store sector has been one of the best performing industries in the market over the past year. Consumers have flocked to the tremendous bargains found in these stores like bees to honey, as the economic picture has been gloomy, at best. One major player in this industry is Dollar General (NYSE: DG). Dollar General is a discount retailer in the United States, possessing 9,961 stores located in 38 states, as of March 2^nd, 2012. The company offers a wide array of consumables, seasonal, home products, and apparel. The company employs 90,000, and is valued at $16.97 billion on the New York Stock Exchange. Over the past year, the company’s stock has rallied 56.90%, dominating the broader market, which has only rallied 19.53% during this same period. So should this general be commanding investors’ portfolios?

Concrete Strength Fundamentals

In 2010, Dollar General reported earnings per share of $1.04 and sales of $11,796 million. In 2015, the average analyst consensus believes the company will derive $3.97 per share and $19,334 in sales from its business operations. This represents a projected a 281.73% increase in earnings per share and a 63.90% increase in sales over the course of a half decade. Based on these statistics, the company compound annual growth rate (CAGR) is 30.72% for its earnings per share, and 10.39% for its sales, both remarkable feats for any company. Dollar General possesses a dynamic duo, increasing sales and improving margins. This aspect of Dollar General’s business is extremely advantageous. Dollar General’s business appears to be extremely healthy, as over this period its top and bottom line grow. The hard facts up to 2012 also confirm this encouraging trend. At the current moment, Dollar General does not pay out a dividend, and has expressed no intentions of doing to so in the future. From this we can see Dollar General’s incredible underlying financial strength, annualized double digit growth rate, and lack of dividend.

The chart below displays Dollar General’s sales, operating profit, net income, operating margin, net margin, and earnings per share over the coming years.

Courtesy of Zonebourse.com

Business Model & Drastic Expansion Plans

Dollar General’s business is very simple. It attracts business by offering products at incredibly low-prices, putting more of an emphasis on volume versus margins. With the American economy struggling to pull itself out of the financial hole it has been in the past stretch of years, millions of Americans are still struggling to put food on the table. Dollar General caters to the consumer that wants to save money on necessities, such as clothing and food. The desire for these items has grown continuously, as still over 8% of Americans are unemployed. Even when economic conditions improve, consumers will still want to save money. All in all, Dollar General caters to a growing crowd of Americans that are looking to save money, and this crowd will continue to grow as Americans further realize the importance of money.

Dollar General’s extensive growth has been fueled by its rapid expansion plans. As the chart below displays the number of the stores that company operates has continuously increased, as with the sales per square foot of the stores.

Courtesy of Dollar General's 2011 Annual Report

Dollar General is showing no signs of fatigue, and it is probable that this trend will continue into the future, further fueling growth in Dollar General’s stock.

Who Offers The Best Prices?

Compared to some of Dollar General’s most prominent competitors, such as: Family Dollar Stores (NYSE: FDO), Dollar Tree (NASDAQ: DLTR), Target (NYSE: TGT), and Costco Wholesale (NASDAQ: COST), Dollar General compares relatively favorably.

In terms of growth, Dollar General is the industry leader, while Target is the industry laggard. All companies pay out dividend, except for Dollar General and Dollar Tree, with Target possessing the largest and fastest growing dividend. In the fundamental ratio comparison, Target is the industry bargain, while Costco trades at a premium to its peers. When growth is taken in account, Dollar General is undervalued, while Costco is once again overvalued. In the net profit margin comparison, all companies possess relatively low multiples as they attempt to balance value and making money.

The Foolish Bottom Line

Dollar General has been on an absolute tear over the past year. The company is a leader in the discount retailer industry. Its financial strength is impeccable, with its top and bottom lines increasing consistently. The company possesses an annualized double digit growth rate, yet does not pay out dividends to its shareholders. The company’s business is thriving as consumers are persistently in search of bargains, and further growth is expected due to the company’s drastic expansion plans. The foolish bottom line is Dollar General is a tremendous addition to any portfolio with a long-term horizon, and should be commanding investors’ portfolios.    

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