Dollar General Corp. (DG): 1 Stock That You Should Never Discount

There was no doubt that discount retailer Dollar General Corp. (NYSE:DG) would bounce back after being beaten down a little over three months ago. The stock was punished after the company reduced its outlook for the recently-concluded fiscal year, but it has rallied around 15% since then. Dollar General’s latest quarterly report was enough to lend further momentum to the stock, as the company expects another solid year.

Moving forward with confidence

Dollar General Corp. (DG)

After growing revenue 8% in the previous fiscal year, Dollar General is looking at an even better rate of 10%-12% this fiscal year. However, the company’s bottom line will continue to be under pressure due to higher sales of low margin products. As a result, Dollar General Corp. (NYSE:DG) is looking at earnings of $3.15 to $3.30 per share this year, while analysts expect it to earn $3.27 a share.

However, a weaker-than-expected bottom line forecast couldn’t diffuse investor enthusiasm, and the stock is trading up as of this writing. Management’s positive commentary, as opposed to the previous conference call, added to investor confidence.

Last time, CEO Rick Dreiling commented that the looming fiscal cliff, weak consumer confidence, and payroll tax cuts would limit purchasing power. But, these are the sort of circumstances that should help a discounter such as Dollar General Corp. (NYSE:DG) perform better. Thus, it was not surprising that the CEO changed his tone this time around, telling Buckingham Research analyst John Zolidis over the call that, “…when times get tough, our customer needs us even more.”

Poised to perform

With an assortment of low-priced products Dollar General is equipped to perform well in difficult times, and it is going all out to push its top line higher. The company’s decision to sell tobacco products turned out to be a good one, as it is selling 33% more tobacco than projected. Its same-store sales grew 4.7% in the last fiscal year, better than the likes of peers such as Dollar Tree, Inc. (NASDAQ:DLTR), which saw an improvement of 2.4% in the previous quarter.

Dollar General has witnessed 23 consecutive years of same-store sale growth, and the company is focused on keeping the momentum intact. With more than 10,000 stores, Dollar General Corp. (NYSE:DG) already has a wide network, which is an advantage. But the company isn’t sitting idle, and it increased its selling square footage by 7% last year. Dollar General has been making forays in California and Massachusetts, two states where it doesn’t have a solid presence.

Dollar General is aggressively growing its network, and plans to open around 635 stores this year, apart from remodeling or relocating another 550. The discount retailer has been expanding its offerings, and is aggressively installing coolers in its stores in order to drive sales of consumables higher. The company has been gaining market share over rivals, and its moves into unaddressed areas would certainly help it in generating more revenue going forward.

Dollar General is also looking to keep costs under control. Its stores don’t require huge investments to build and operate, while the returns from these stores come pretty fast. The deployment of distribution centers should further help Dollar General Corp. (NYSE:DG) save costs and keep operating margin growth intact. In fact, the company’s gross margins would have improved this year had it not been for its tobacco offerings. However, on the brighter side, tobacco products are driving sales and helped the company achieve record revenue in the previous quarter.

Stiff competition

But, it shouldn’t be ignored that Dollar General is plying its trade in a highly competitive industry and a difficult macro environment, where margins are being squeezed by price wars and rising costs.

For instance, Dollar Tree is looking to go on the offensive with its ambitious store expansion plan, low pricing, installation of coolers, and other strategies to attract consumer attention. It is looking to increase square footage by 7.3% this year, after a 7.7% growth last year. Such moves clearly indicate the company’s ambitions, and it poses a serious challenge to Dollar General Corp. (NYSE:DG).

In addition, Wal-Mart Stores, Inc. (NYSE:WMT) is also doing its bit in escalating the price war. Wal-Mart is moving into the territory of dollar stores by offering merchandise for $1, and undercutting competitors on pricing. Wal-Mart is aggressively promoting its low prices, a move objected to by competitors. However, the retailer is already witnessing the benefits of low prices and aggressive advertising, as same-store sales jumped 1.2% after Wal-Mart’s promotional campaign.

The takeaway

Dollar General is looking to grow its revenue in a difficult environment through store expansions and better product assortment. The company is promoting sales of low-margin products in order to keep traffic intact and remain competitive. While it faces stiff competition from peers, the company stands to benefit from the tepid economic environment, driven by its wide store network and strategic moves. Keeping these factors in mind, it won’t come as a surprise if it continues to get better as the year progresses.

The article 1 Stock That You Should Never Discount originally appeared on Fool.com and is written by Harsh Chauhan.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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