Coverage initiated December 29, 2020, at $211 in the Special Opportunities portfolio.
Dollar General was originally founded more than 80 years ago. It became a publicly traded firm in 1968 and remained that way until Kohlberg Kravis Roberts (KKR) bought the company in a take-private transaction in 2007. Fortunately, KKR took Dollar General public again in 2009.
Despite its name, the company sells an array of items at up to $10, and this value proposition greatly appeals to customers. The company focuses its merchandise on everyday items across four categories. Consumables is the largest, accounting for more than three-fourths of their sales. This includes merchandise like paper goods, cleaning products, soap, shampoo, cereals, milk, eggs, and snacks. Seasonal products, generating 12% of sales, sell holiday items, toys, gardening supplies, small electronics, and greeting cards, among other items. The other two categories, Home Products (kitchen supplies, cookware, small appliances, light bulbs, candles, etc.) and Apparel (casual clothing, socks, underwear, disposable diapers, etc.) make up the remaining 10% of sales.
Customers can easily reach the stores, which are no-frills, low-cost real estate allowing Dollar General to keep costs down. The company locates its stores mostly in small towns with populations of up to 20,000 people, and there is plenty of growth left as the company is adding about 1,000 stores annually. That’s about 20 new stores a week! It has almost 17,000 stores now.
The company’s 2021 real estate plans include adding fresh produce to about 600 stores—in addition to 1,000 that already have such an offering. About half of its new units—and 75% of its remodels—will open under its “Traditional Plus” format, which include 34 cooler doors vs. 22 for the traditional model, bringing the company further into competition with food retailers. It has unveiled a new store concept it says provides “stress-free and guilt-free” shopping for non-consumable items such as seasonal and home decor, health and beauty, home cleaning supplies, party goods, and entertaining needs. Known as Popshelf, the company intends to open 30 such stores by early in 2021. The demographic is a bit more upscale, with the concept being to raise the average amount that a typical customer spends.
With its low prices and focus on goods that people regularly use, Dollar General has produced consistently strong results through various economic periods. In fact, it entered 2020 with 30 straight positive annual same-store sales increases and it is poised to have another one when this fiscal year ends at the end of next month.
Dollar General’s competition is a familiar cast of discount retailers. Direct competitors include Family Dollar, Dollar Tree, Big Lots, and 99 Cents Only.
It also faces behemoths companies like Walmart and Target. Dollar General has proven it can not only survive, but thrive by offering smaller, more convenient stores that are strategically located allowing customers to easily pick up a few items rather than going to a supercenter.
The company is not merely benefitting from the pandemic; they have been reporting strong sales and earnings results for years. In fiscal 2019 (ended January 31, 2020), its comps were 4% higher. With existing stores doing well and new ones being added, the company’s sales rose to $27.8 billion from $25.6 billion, an 8% year-over-year increase. Earnings per share increased by 11% from $5.97 to $6.64.
While the pandemic and toll it took on the economy were unfortunate, the company’s growth accelerated this year. 3Q20 comps rose 12% and sales were 17% higher to $8.2 billion. With strong demand, the company didn’t have to discount the merchandise to clear the shelves, plus it sold more non-consumable goods, which have a higher margin. This led to gross margins expanding by 180 basis points to 31.3%. Higher sales and margins drove earnings 63% higher to $2.31 versus $1.42 in the year-ago period. Impressively, the large profit increase came about despite cost increases, such as employee bonuses due to the pandemic. As tough times continue, shoppers will continue to frequent Dollar General stores to make their dollars go further.
This higher profitability over the years has translated into more cash flow generation. The board of directors and management have used this to reward shareholders by paying increasingly higher dividends every year and buying back shares. Since paying its first dividend in 2016, the company has grown its annual amount from $0.88 to $1.44, a 10% compounded annual growth rate. While the dividend yield isn’t great at 0.7%, it is nice to know you can count on higher payments in the future to boost your return.
The Street likes the company’s consistently improving results as the stock continues to reward shareholders. This year, the stock’s 36% appreciation trounced the S&P 500’s 15% gain. It is off from the $225 all-time high reached in November. This is just people taking some profits off the table. With all the company has going for it, we’ll look back fondly and wealthier in a few years.
Dollar General’s top shareholders are BlackRock and T. Rowe Price, which each own 10% of the company, followed by Vanguard’s 8% interest.
Dollar General nicely balances our higher growth, more economically sensitive recommendations. It does just fine when the economy is humming along, and it does particularly well when times get tough.
We are initiating coverage with a $249 Target Price and a $170 Sell Price.