The Company: Dollar General Corporation (DG) is a discount retailer having a large-cap market size. The company was founded in 1939 and went public in 1968. As of last year, the company is operating around 16,300 stores in the United States. Dollar General offers a wide variety of products but with limited inventory. Its business model focuses on convenience and great prices.
Advantages: Dollar General can open stores in a wide variety of locations due to its smaller size. Combine that with its convenienceand great price business model, I think that puts it in its own little niche of the industry. Their prices points arecompetitive - allowing it to attract a wide variety of customers in both good and bad economic times. Remote areas which larger stores such as Walmart won’t even consider due to the lack of people, are great locations for Dollar General. Since a store only needs limited land, construction, and inventory; it isn’t a significant capital allocation relative to its market cap. In summary, there is a limited financial risk to plant a store.
Disadvantages:
Its biggest competitors are stores like Dollar Tree, Five Below, and mom and pop local grocery stores. Dollar Tree and Five Below offer lower quality and fewer products, but generally at a lower price. I wouldn’t say these stores are fierce competitors but they could steal potential revenue if located near a Dollar General. I don’t see much turmoil from Mom and Pop stores unless they have a local producer or a loyal customer advantage. The biggest risk from an investor’s perspective is the management. Since it can plant stores pretty much anywhere, it could get it in trouble if they are not placed strategically.
Valuation and Current State: DG currently has an enterprise multiple of around 15 putting it at a reasonable valuation at first glance. Valuation ratios such as P/E, P/S, P/B, ROE, and P/CF, are at reasonable values but are currently a little higher than their 5 year average. The debt is something to pay attention to. When looking at the debt to EBITDA ratio, we see something close to 0.5, which is reassuring. With the amount of FCF the company creates, it can pay down debt if needed to be. The company offers a dividend that is only a small portion of net income - around 14%. The dividend has consistently increased over the years. The highlight of this company is the growth over the past few years and projected future growth. The growth levels are seen in the net income as well; around 14% over the past 5 years and are projected to be the same, if not better. Lastly, the company has consistently bought back shares over the years which is always a good sign.
Final Thoughts: With the simple business model, I see the growth projections staying on the track. Since the industry niche that it’s in isn’t incredibly attractive; I don’t see competitors interfering. I’m drawn to unpopular companies and industries so you could say I’m naturally drawn to this pick. Especially with the consistency I see in the financial statements, I would like to see a correction before taking on a position but overall I like this pick.
Links:
https://www.morningstar.com/stocks/xnys/dg/valuation
https://finance.yahoo.com/quote/DG/key-statistics?p=DG
https://www.gurufocus.com/stock/DG/summary?search=dg
https://www.fool.com/investing/2021/01/06/better-buy-costco-vs-dollar-general/
https://www.dollargeneral.com
https://finance.yahoo.com/news/why-dollar-general-analyst-turning-195628496.html
https://simplywall.st/stocks/us/retail/nyse-dg/dollar-general/news/is-dollar-general-nysedg-using-too-much-debt
https://simplywall.st/stocks/us/retail/nyse-dg/dollar-general/news/if-you-like-eps-growth-then-check-out-dollar-general-nysedg/amp
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