Dollar General Corp. (NYSE: DG) is a discount retailer with around 10,000 stores located in 39 states primarily in the southern, southwestern, midwestern, and eastern areas. The company offers a selection of merchandise at discounted prices and is able to do so through convenient small-box locations that are often no more than 7,700 square feet.
The company belongs to a unique category of retailer that has been able to navigate the financial crisis comfortably. The turmoil that engulfed financial markets and the subsequent financial burden felt by ordinary consumers has meant that discount retailers such as DG have been able to flourish in a world of declining consumer spending and reduced credit.
However, five years on from the financial crisis and Dollar General is still going strong, even as the U.S. has moved out of recession.
Of course, the main reason for this is that, although economic growth may have improved from its 2008 nadir, progress is still relatively sluggish and ordinary consumers are just as strapped for cash as they were a few years ago.
Whichever way you look at it, this scenario is unlikely to change soon. With economic data that is not seen to be substantially improving (see last month’s retail sales which came in at just 0.2 percent against the expected 0.5 percent) and with the Federal Reserve cutting back their $85 billion worth of asset purchases, the prospect for a new period of prosperity is slim.
Indeed, according to studies into market cycles, recessions typically occur every four to six years, so we are now due another. Just look at our three key indicators for a potential recession and you’ll see we’re potentially heading that way right now.
What this means is that consumers will still be favoring discount retailers and this is the reason why Dollar General has done so well of late.
Earnings Results for Dollar General
Recent earnings numbers from Dollar General confirm the company is in a good place, with second quarter EPS coming in at $0.77, ahead of the anticipated $0.74. When compared to last year, revenue was up 11 percent while earnings were up by 17.2 percent.
The growth in revenue can be largely attributed to the rise in sales of consumables, which now account for around 75 percent of all DG sales and is a growing market for stocks in this sector. However, Dollar General has also increased its reach by expanding the number of its stores by 6.5 percent as well as increasing the size of its locations.
Increasing Sales, Year-on-Year
Aside from the recent earnings announcement, Dollar General has a compelling history of a growing revenue base, which really makes this stock stand out as a good performer.
In fact, DG has grown at an annualized rate of 11 percent over the last five years, and has improved same store sales over the last 20 consecutive years. The biggest growth in sales came during the 2008 bear market, so it’s clear that this is a defensive play as well as being a strong growth story. And defensive plays are not easy to find these days — especially given the implications of recent Federal Reserve policy measures.
Indeed, as QE is unwound and the prospect of another downturn plays out, defensive stocks may become quite fashionable among investors once more.
However, Dollar General is more than just a defensive stock, as it is clearly operating in an environment that is experiencing steady, year-on-year growth. And with U.S. unemployment remaining stubbornly high, this is unlikely to change.
With money coming in, Dollar General management are clearly keen to grow the company further and there are plenty of opportunities to do so, not just in the U.S. but also abroad.
While DG already operates over 10,000 stores, there are at least 10 states without any DG stores at all. Such states could offer plenty of opportunity to open new locations, as does Canada which has been touted as a future project by DG executives. In fact, Canada could offer even better prospects for growth than the States as the market for discount retailers is relatively less saturated over the border.
According to studies by Kantar and PwC, discount retailers are predicted to be one of the fastest growing retail categories over the next 10 years and are expected to grow by 7 percent year-on-year until 2020, (there aren’t many industries around that can say the same).
There is plenty of time then for Dollar General to increase its 40 percent market coverage and expand on its recent successes.
What are your thoughts on Dollar General Corp. and other bargain retailers?
Joe is a professional trader with over 5 years direct experience trading financial markets. He began his career trading futures for a broker in the city of London and now works through his own company.