This Stock Could Make You 'Dollar' Rich
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Some stocks never let you down.
Dollar General (NYSE: DG) is one such stock. The company has shown immense growth potential ever since going public. In fact, its shares have gone up by more than 12% in the last month. In the face of rising gas prices and weak consumer spending, the discount store chain has managed to hold its own.
The company announced its fourth quarter and full year 2012 result in recent days. As expected, the numbers are impressive, especially for the quarter, and performance has been termed as "outstanding" by some.
Fourth quarter net sales rose 0.5% to $4.2 billion as compared to the same quarter last year. Excluding the week ending Feb. 3, 2012, net sales advanced by 8%. Same-store sales also increased in the period amid demand for consumable items.
Diluted earnings per share climbed to $0.97, which represents a 14% increase over the year-ago period. Net income increased from $293 million in the year-ago period to $317 million this year. Gross profits as a percentage of sales increased by 34 basis points year-over-year.
What, one may ask, is the reason behind these robust figures?
For one, strategic investments fueled strengthened Dollar General's market share in the quarter. A reduction in the store's LIFO reserve, improvements in transportation facilities, and an increase in markups also drove the improved quarterly performance.
The year that was..
For the full year, the company's net sales increased 8.2% year-over-year to $16 billion. Same-store sales advanced 4.7%. Net income jumped from $767 million in 2011 to $953 million in 2012, an increase of 24.2%. Diluted earnings per share were $2.85 for the year versus $2.22 in the year-ago period.
Throughout the year, Dollar General made some changes to its merchandise offerings. Also, the discount retailer placed a focus on store standards, category management and store footage in 2012, leading to considerable improvements.
The changes translated into increased customer foot traffic and higher transaction amounts on average. Sales were higher in consumable items versus non-consumables, with most of the growth coming from snacks, packaged food, beverages, candy and perishable food items.
Dollar General opened 625 new stores in 2012 and remodeled 592 of the existing ones.
The company has a strong outlook for 2013, and expects total sales growth of between 10% and 12%. Same-store sales are projected to increase between 4% and 6%.
The company plans to open approximately 40 Dollar General Plus stores and 20 Dollar General Market stores in 2013, and in total will add 635 stores this year.
Let's have a look at how Dollar General compares to other stocks in its segment.
One of the major players in the discount store segment is Dollar Tree Stores (NASDAQ: DLTR), a Virginia-based store chain. The company normally imports more products and sells less consumables as compared to its rivals. In its recent quarter, the company posted same-store sales growth of 2.4%, with earnings per share of $1.01. The company, however, doesn't have a very rosy outlook for 2013.
Better than expected quarter results notwithstanding, Dollar Tree still has a long way to go.
For one, with approximately 4,600 stores in the country, Dollar Tree poses little competitive threat to Dollar General, the largest chain in the category. Secondly, the store doesn't sell tobacco products, which have a lower margins. This may be counter-productive, however, as in its most recent quarter, Dollar General's revenue increase stemmed in part by higher tobacco-product sales.
Also, Dollar Tree adheres to a fixed price system, with all items prices at $1, which places increased pressure on its gross margins.
The other competitor in this segment is Family Dollar Stores (NYSE: FDO)The chain operates over 7,400 stores across the country. With a flexible pricing system, Family Dollar has been known to increase its inventory of consumable items at the cost of lower margins.
Earlier this year, the retailer posted lower profit margins and slashed its 2013 outlook. Weak sales and slim margins pressured the stock lower by 13% in January. The company may have to modify its business strategy if it wants to give some solid competition to Dollar General.
The prospect of a higher payroll tax made it tougher for discount stores to post profit margins. Coupled with weak consumer spending, the near future looks a bit dull for all discount stores in general.
With over 10,500 across the US and some great sales figures, however, Dollar General's lead is head and shoulders above its competitors. I wouldn't expect it to do too badly in the quarters to come, in spite of the macroeconomic scenario. The company is known for its resilience during economic downturns and its impressive quarter results only prove this point.
Its aggressive store expansions, the inclusion of new branded products, a flexible pricing system and continued improvement in management processes make Dollar General a solid company. So investors, hold on. If history is any teacher, this company will sail through the rough times.
Sonam Chamaria has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!