Dollar General Investment Thesis

Dollar General Corp (NYSE:DG) is a Goodlettsville, Tennessee-based retail chain that services the continental United States. The company continued growing through the pandemic, but is having trouble competing with rivals like Dollar Tree (DLTR) and Big Lots (BIG), much less the behemoths of Walmart (WMT) and Amazon (AMZN).

With the economy on its way to recovery, it’s time to revisit the Dollar General investment thesis.

About three-fourths of all Americans live within five miles of a Dollar General store, and many of these are in low-population towns. These towns may not be able to support the full range of retailers, and dollar stores act as a general store for a smaller group of people.

Of course, that limits the potential profitability of each store. And it’s competing for those “low-value” towns, which results in a high overhead cost. Still, the company grew in the midst of national travel advisories while other retailers struggled and even shut down.

Will it continue to thrive? The size of the pie it can own offers a clue.

Dollar General Market Share

Dollar General holds about 3 percent of the total retail market, which includes companies like Bed Bath and Beyond (BBBY), Costco (COST), Home Depot (HD), and CVS (CVS).

This is a $4.89 trillion market, but Dollar General, Dollar Tree, and Big Lots compete in a specific subsection of discount retail.

In that market, Dollar General (DG) is the leader with 16,278 stores generating $25.6 billion in net sales. This compares to Dollar Tree’s $23.61 billion in net sales coming from 15,700 retail locations.

Both stores are among the top American retailers, showing the necessity of the niche they serve. Low-income consumers in low-income areas may not have the same access to internet and the ability to enjoy two-day or same-day delivery.

The fallout from panic shopping sprees also increased its sales as toilet paper, disinfectants, and other essentials flew off the shelves. The only problem is Dollar General doesn’t have much of a moat.

Does Dollar General Stock Have A Moat?

The biggest benefit the company has is its large retail footprint in low-income areas. That creates a barrier to entry that many retailers may not even want, much less can build. And its growth plans were started long before the pandemic, which did little to slow it down.

The company is using this footprint to expand into other markets, like fresh produce through its DG Fresh stores. Each store is working to make the most of its square footage to optimize profitability.

Its this backend work that will ultimately determine the company’s success. And even that’s not much of an advantage.

Rivals also have impressive retail footprints, and there’s only enough available commerce to support so many stores in these communities. Dollar General will eventually reach a point where it can’t build any more stores and needs to depend fully on optimizing the profitability of existing buildings.

It will need growing revenues to do that.

Dollar General Revenues Grew In Spite Of Lockdowns

Dollar General 2019 sales revenue of $25.6 billion grew by 8.31 percent to $27.7 billion in 2020. This shows the company did a good job of servicing the needs of spree shoppers while navigating local shutdown orders.

Of course, national restrictions did somewhat slow its ability to continue building new stores. The company has an aggressive expansion plan that involves building 1,050 new stores in 2021 though.

This expansion will help it continue adding to sales revenues, and it’s remodeling and repurposing others. These initiatives include pushing towards more sales of higher-margin goods. Meanwhile, it’s implementing better pickup services to further bring it in line with other stores.

Expansions like this cost money though, and that’s going to eat into the bottom line.

Dollar General Earnings Undulate Seasonally

The company continues to beat earnings expectations and raised expectations for its fiscal year 2020 to $10.71 per share. This is up 59 percent from 2019, although this year’s expansions and other operational expenses are going to greatly slow that growth.

However, the above initiatives could help improve the bottom line and give it more breathing room in margins.

Expectations for the current fiscal year come in at $10.07 per share, which is a negative impact on income. That could deter investors looking for a short-term gain, but it ignores the long-term impacts of its pandemic preparedness.

Delivery and online ordering will add another income stream that could ultimately outpace the retail stores. If this happens, the company effectively built a distribution network that could step on the toes of giants like Amazon (AMZN) and Walmart (WMT), especially in communities underserved by major retailers.

This all depends on the executive leadership’s ability to navigate the business environment though.

Dollar General Management Quality

Todd J Vasos became CEO of Dollar General in 2015, and the company started its search for his successor in late February 2021. Vasos said it’s simply a precaution due to his contract ending in June. He had no current plans to step down, but Chief Operating Officer Jeff Owen is one of the leading contenders for his position.

Since Vasos took the reigns, Dollar General stock rose 170 percent, compared to the S&P 500 General Merchandise Stores index, which grew 115 percent in that period. This shows his strong leadership, and the effects of the push to fresh produce and other initiatives could continue increasing for the next decade.

Regardless of who’s in charge, it’s clear the board has a clear focus on the direction the company should take. The few brick-and-mortar retail chains that didn’t have a large online presence before the pandemic are now much more technology-focused.

Despite these moves, there are several hurdles on the company’s roadmap.

Are Dollar General Expansion Opportunities Limited?

The biggest challenge facing Dollar General is competition.

It’s a fully saturated market that ultimately has a limited growth potential without expanding internationally. That would best be done through a merger with a similar store in another continent.

And there’s also the potential of a $15.00-per-hour minimum wage to consider. A large portion of the company’s 157,000-person workforce consists of minimum wage employees.

With the Democratic-led government consistently discussing raising the minimum wage incrementally through 2025, the company faces higher operational costs. In fact, the company’s target demographic is people making minimum wage.

This could mean Dollar General can effectively raise prices alongside the wage costs, so long as it stays within the range of other discount retailers. Because it largely serves low-income consumers, the company could end up as a barometer of economic recovery.

Dollar General Investment Thesis Conclusion

Dollar General is a discount retailer trading at discounted prices. It has a wide footprint of retail stores in small communities that may not be able to support a large retail presence.

It focuses on families making under $40,000 by offering low-cost essentials. This has positioned the company to grow revenues and earnings while much of the retail complex suffered due to health guidances.

Management has been focused on upgrading stores and the company’s online presence while continuing to expand. The retailer is also pushing into fresh produce and higher-margin goods that should give it breathing room to build over the longer term.

These moves should help it continue to grow for the foreseeable future, even if the pace of growth slows in the short term.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.