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The dollar store sector has always been a favorite of mine. I love the idea of a deep discount store, and the fact that they have a massive base of tens of thousands of stores tells me the American public loves them, too.
These stores have also managed to change with the times, adding brand-name products so they don’t rely on garbage generics, adding produce, and constantly shifting the product mix.
Dollar General (NYSE: DG) reported interesting numbers Thursday, giving insight about the company, the sector and the economy.
Has Sector Reached Saturation?
Dollar General earnings per share came in at $0.88, which beat most estimates by one cent. This helped offset a $20 million revenue shortfall, coming in at $5.07 billion.
EPS grew 11.4% year-over-year, on a 7.3% sales increase. However, we always look at net income and not EPS. That’s because EPS can be cheated upwards with stock buybacks. Indeed, net income only increased 5% to $253 million. That is not terribly impressive overall growth, and one wonders if the dollar store sector has reached saturation.
What happened in each segment? Consumables sales increased 7.6% to $3.92 billion. That’s a healthy increase and shows the move that dollar stores made into the food business is still paying off.
Dollar General earnings report showed seasonal sales rose 6% rise to $556 million. Home products was up 6.4% to $318 million. Apparel sales increased 6.09% to $272 million. This is also suggestive of a nice, healthy business across all of these segments. I like that seasonal sales stayed strong, because it suggests that even if times are tough, people can’t do without their seasonal items.
Operating profit grew 7.5% to $424 million, which is about what we’d expect given the sales figures in the Dollar General earnings release.
The all-important comparable-store sales only grew 2.3%, though. That’s sluggish. It’s OK, but not all that great. It basically means that real growth isn’t happening. It’s puttering along.
Dollar General’s gross margin expanded 19 basis points to 30.7%. We always want to see growing margins, since it means management is handling inventory and expenses properly.
So on the earnings front, I basically say, “Meh.” I’m not impressed and I can see why Dollar General wanted to buy Family Dollar. It wanted to expand via acquisition.
As far as the balance sheet goes, things are stable. The company has $183 million in cash, and debt of $3.1 billion which is only costing it $88 million annually in interest.
Stock Buyback Questions
I don’t like that the company bought back some $280 million worth of stock during the quarter, and 1 billion dollars’ worth so far this year. I’d rather have that billion bucks as dividends, instead of management squandering it on what is an overvalued stock.
At $3.90 per share in EPS this year, and a stock price of $68, Dollar General trades at 17.5x estimates. With net income growing at only 5%, I see the stock as wildly overvalued.
At this point, Dollar General has the same number of stores – more or less – than the combined entity of Family Dollar and Dollar Tree (NASDAQ: DLTR). I’ve done many face-offs of dollar stores over the past 10 years and Dollar Tree wins every time. Although it needs to digest Family Dollar and the stock is presently overpriced, it remains my long-term choice.
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