Dollar General’s Drop Creates Buying Opportunity

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Guess which large-cap stock saw the biggest one-day surge in search volume this month?

Bet you didn’t guess Dollar General (DG). But then again, who would?

We’ve kept an eye on it for a while. What surprised us was the search volume remained elevated for nearly two weeks after.

Yeah, the stock dropped by +25% after the company missed earnings and slashed its sales guidance.

However, with consumer defensive stocks trading at premium multiples, this move may have put this particular stock on sale.

Dollar General’s Business

Founded in 1939 in Kentucky by J.L. Turner and Cal Turner Sr., Dollar General (DG) was one of the nation’s first discount retailers, making its mark across the southern, southwestern, midwestern, and eastern United States. 

Today, the company operates over 19,000 stores in 47 states and Mexico. 

Their growth strategy blends organic expansion and acquisitions, all under the umbrellas of four unique business segments: 

• Dollar General (94% of sales): Traditional stores offering everything from consumables to home products and apparel.
• DG Market (4% of sales): Larger format stores providing an expanded selection of consumables and fresh produce.
• DGX (1% of sales): Smaller format stores catering to urban customers with consumables and grab-and-go options.
• pOpshelf (1% of sales): Standalone stores offering non-consumables like home décor, beauty products, and crafts at affordable prices.

At its core, DG’s mission is simple yet impactful: providing customers with everyday low prices on various items such as:

• Consumables (80.3% of sales)
• Seasonal (8.6% of sales)
• Home products (6.4% of sales) 
• Apparel (4.7% of sales)

The company also provides convenience with online services like dg.com, DG Pickup, DG GO!, and DG Fresh.

In the latest earnings report, same-store sales rose 1.6% versus estimates of 3.8%. Declines in all three other categories offset consumables growth.

Management cited a more challenging macroeconomic environment than expected.

Financials

Source: Stock Analysis

Dollar General’s done remarkably well, achieving high single-digit sales growth most years.

At the same time, it’s managed to hold margins fairly steady.

Really, the only decline has been in free-cash-flow margin, which is largely a result of bloated inventories.

The $18 billion debt looks significant, especially since it was only $2.7 billion before the pandemic. However, that’s largely due to converting many of its properties to capital leases. This increases PP&E by a similar amount.

Valuation

Source: Seeking Alpha

Compared to other consumer defensive stocks, DG is somewhat in the middle.

Its P/E ratios are the lowest of the group, save for Target’s (TGT) forward P/E ratio.

However, it has the second-highest price-to-cash and price-to-sales ratio.

Costco (COST) and Walmart (WMT) both trade at astronomical P/E ratios.

Growth

Source: Seeking Alpha

DG is the only one of the group with double-digit revenue growth last year and is forecasted at the second-highest growth for next year.

In fact, other than COST, DG is the only one to achieve high single-digit revenue and EBITDA growth over the last few years.

Profitability

Source: Seeking Alpha

Interestingly, Inbev (BUD) runs the highest margins across the board.

Otherwise, DG trounces its peers, even hitting the highest return on equity of the entire group.

Our Opinion 8/10

Dollar General doesn’t pay a huge dividend. However, it bought back 10% of its shares over the last two years.

While it could go lower if the entire sector reprices, we still like it relative to any of its peers and wouldn’t be opposed to taking a position here.

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