A Dollar for Everyone
sayar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
All dollar stores seem to be concerned about the impending fiscal cliff and have very cautious projections for the coming year. Dollar General (NYSE: DG) published exquisite results last week but concerns about the future, patchy economy and projections of increased advertisement costs were enough to pull the stock price down. Other dollar stores also faced a reduction in their share prices after a word of caution about future prospects were made.
Churning the numbers
Dollar General has produced stellar numbers this quarter. Revenue rose by 10.3% compared to the same quarter last year and was reported at $3.96 billion. This was the fifth consecutive quarter where the revenue has risen in the double digits. The net income beefed up by 21.3% from $171.2 million to $207.7 million growing consistently over the last three quarters.
The consumers are purchasing on the basis of need in the holiday season, but the company is making progress by increasing its market share modestly even amidst competition. The company’s gradual reduction in share price by about 50% has improved customer satisfaction and sales. Further reduction of $500 million in costs will help the company to tap in lower prices.
Dollar General is taking diverse steps to improve customer loyalty and plans to invest in margin improvements for that matter. The company plans to invest in advertisement, lowering prices of certain goods and make a strategic investment of zone pricing.
Market Seems a Mixed Bag/ Reactions to Counter Actions
Dollar General has a track record of 23 years of same store sales growth and it is taking up market share of its peers like Dollar Tree (NASDAQ: DLTR). Dollar General has improved its same-store sales forecast for the year to 4.5-5%, up from the previous expectation of 4-5% while Dollar Tree has witnessed same-store sales growth of just 1.6% (as per last published earnings). Dollar Tree is also trying to expand with an aggressive store expansion program and tap its customers in the constrained economy by offering $1 products.
Wal-Mart’s (NYSE: WMT) massive scale and efficiency has pressured Dollar General to operate on lower budgets and spend more on advertising. Though, Dollar General is outpacing the same store sales growth of Wal-Mart, but its entry into the micro market is a concern for the company. In response to Wal-Mart’s invasion, Dollar General is building larger stores and selling groceries and other merchandise through Dollar General Markets and Dollar General Plus stores.
Dollar stores understand the value of price conscious consumers. Dollar General’s private labels are a relief for consumers suffering from economic pressures. The company is planning to add 150 private label brands which should prove to be a high margin product for the company in the near future.
A Foolish Thought
Dollar General is taking the competition head on and making strategic changes to counter them. Wal-Mart’s entry is a great challenge for the company. I feel Dollar General and Dollar Tree both are cheaply priced at a trailing P/E of 16.38 and 15.60, far below the industry average of 21.59. Dollar General has delivered consistently and has tremendous potential to deliver in the future which should not be ignored.
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