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3 Key Reasons to Invest In Dollar General Corp. (DG)

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Over the last few years, the Dollar Store segment has shown a remarkable outperformance. Dollar General Corp. (NYSE:DG), in particular, has become an increasingly attractive investment opportunity. In a previous article, we analyzed the risks that any potential stockholder should take into account when considering to participate in this business. In this occasion, we will look into the main reasons to believe that this company is worth our trust.

1) The growth potential of the Dollar stores concept

Although many seem to be concerned about the US economy, the fact is that, at least for Dollar Stores, the outlook is not bad at all. Even though some could argue that this business relies on a bad economy, where customers turn to Dollar Stores looking for value, the growth of disposable personal income over the last couple of years has largely benefited the segment. The key to their success could be in the fact that we are dealing with a differentiated concept, with considerable structural advantages, and plenty of growth opportunities which, by the way, have not yet reached their ceiling.

While this business continues to take advantage of the comparative lead provided by their “everyday low price” strategy (in average, Dollar Stores offer prices 20% below supermarkets and drugstores), plenty of opportunities to increase their profit still exist. The incorporation of tobacco in 2013 will quite likely boost the transit in the shops; room for further improvements in store productivity, in-stock positions, etc., as well as a market that is far from saturated and allows the construction of at least 15,000 more Dollar Stores, provide other growth factors for the future.
The relation between stock price and earnings per share (P-E) provides another source of compelling evidence that this retail category is experiencing better growth prospects than the typical supermarket or pharmacy: Dollar Tree, Inc. (NASDAQ:DLTR), Dollar General Corp. (NYSE:DG) and Family Dollar Stores, Inc. (NYSE:FDO) have been growing at a CAGR of 10% since the last 5 years (see Table 1), meaning that although paying a higher earnings multiple than a typical supermarket, growth opportunities and rates tend to be higher.

The opposite situation is the one that other players, such as supermarkets, discounters (i.e. Walmart or Costco) and drugstores (i.e. Walgreen, CVS or Rite Aid) have had to face. Undifferentiated and structurally disadvantaged, these segments have been unsuccessful in responding to the changes in consumer behavior, attributed primarily to economic cycles. These conduct modifications seem to have come to stay around for a while and, for the above mentioned reasons, the main beneficiaries of this conjunction appear to be Dollar Stores.

2) Best in class execution
Usually, good management is one of the main ingredients in the recipe for success and Dollar General Corp. (NYSE:DG) seems to have its share. Sales productivity and its EBIT Margin have shown consistent increases over the past years, evidencing good management skills as well as intelligent and effective planning, decision making, and implementation of company policies. Not only are these abilities reflected in efficient resource organization, but also in the adequate selection of locations and real estate deals for new shops. Looking into a company’s administrative board is of great importance to predict future behavior and their odds of success; and, in Dollar General Corp. (NYSE:DG), the figures (see table 1) strongly suggest that the current executives know what they are doing.
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