This Retailer Can Make Your Dollars Grow

Harsh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Discount retailer Dollar General (NYSE: DG) posted impressive numbers and trumped Mr. Market when it came out with its fourth quarter earnings last week. The company’s profits jumped 38% from last year as more customers thronged its stores and spent more on every trip.

Fool analyst Seth Jayson has already given us a lowdown on the company’s numbers in the quarter. Now I will put the company through the wringer and check if it can find a place in your portfolio.

Recession-proof performance

Discount retailers typically perform well in a tough economic environment with rising food and gas prices. Discount retailers such as Family Dollar (NYSE: FDO) and Dollar General find more prominence as consumers prefer to spend less. This is where Dollar General’s offerings come into play with consumers buying more of food among other things at the retailer’s stores to escape the onslaught of high prices. Also, the consumers spent more on every visit they paid to its stores and this resulted in a 20% jump in revenues from the year-ago period.

Another impressive fact about the company was that it managed to grow its same-store sales 6.5% from last year, beating Dollar General’s own estimate of 5%. Sales of consumables and convenience items such as snacks and beverages was the primary top line driver as the company added more items priced $1 to its portfolio. Also, comparable sales of domestic wares such as bedding and floor coverings grew impressively in the quarter. The only sticking point in the quarter was Dollar General’s apparel sales but the company has some plans lined up to increase the visibility of this department.

Doing more

Moving on, let’s take a look at how the future might turn out for Dollar General. The company managed to increase its selling square footage by 7% last year as it opened 625 new stores and also expanded its presence in Connecticut, New Hampshire and Nevada. These new stores should help boost traffic in different areas of the country. Moreover, the company is going to open its 10,000th store in California, a state where it expects to take its store count to 50 by the end of the year from the existing 5.

Dollar General is looking to add another 625 stores (including the California expansion) to its existing ones this year. And around 80 of these will be in markets in California, Massachusetts, Connecticut, New Hampshire and Nevada. These new stores in new markets will undoubtedly give the company more room for future growth.

Valuation

Taking a look at Dollar General’s valuation from a P/E perspective, we find that it is fairly priced when stacked against its peers. Its trailing P/E of 21.23 is lower than the industry average of 23.15 and also lower than peer Dollar Tree’s (NASDAQ: DLTR) 23.51. However, it trades at an expensive P/E multiple when compared to Family Dollar’s 17.83, which is highly impressive. But then, Dollar General has been a consistent performer and is expected to do better in the future as suggested by a forward P/E of 14.68. The wide gulf between the trailing and forward figures suggests that analysts have baked in a lot of growth into their projections.

I have already said that the players in this segment do well even in trying times and Dollar General is no exception. Same is the case with Family Dollar and Dollar Tree, whose forward P/E is lower than the trailing P/E at 13.83 and 16.86 respectively. Thus we see that analysts are taking a positive view on this sector as a whole and Dollar General is a stock which can walk into your portfolio without much trouble. Also, the stock has already gained 14.56% so far this year as against the 11.08% increase in the S&P 500, which is highly impressive considering the economic uncertainty looming on our heads.

The takeaway

In short, Dollar General is a stock which can generate returns even in difficult times and I believe all of us are on the hunt for such stocks. With an impressive history of growth behind it and exciting expansion plans ahead, I believe that Dollar General is a stock to watch out for.


The Motley Fool has no positions in the stocks mentioned above. TechJunk13 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.

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