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Dollar General Corp. (DG), Wal-Mart Stores, Inc. (WMT): Three Risk Factors That Investors Should Evaluate

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When thinking about discount retailers in the United States, Dollar General Corp. (NYSE:DG) is as big as it gets. With over 10,000 stores located in 40 states, it has shown a consistent growth in sales for 23 years now. Here is a chart that shows how strong Dollar General Corp. (NYSE:DG) has grown in the past years:

In addition, Dollar General Corp. (NYSE:DG)‘s management has been focused on store growth:

The constant progress of the company shows certain independence from the fluctuations of the economy and overall prices. However, as attractive and safe as investing in this business may seem, their Annual report warns those interested about several risks. We will focus on three main ones:

1) Intense competition in the retail market

Dollar General Corp. (NYSE:DG) competes with different retailers like Family Dollar Stores, Inc. (NYSE:FDO), Dollar Tree, Inc. (NASDAQ:DLTR), Wal-Mart Stores, Inc. (NYSE:WMT), Walgreen Company (NYSE:WAG) and CVS Caremark Corporation (NYSE:CVS), amongst others. Although some of these companies face overexpansion issues and diminishing returns, others still have greater financial, logistic and operational resources than Dollar General Corp. (NYSE:DG), thus being able to attain better deals with suppliers. In order to maintain competitiveness, prices at Dollar General Corp. (NYSE:DG)‘s stores must remain low, therefore reducing a potential increase in profit margin.

Another source of concern is the incursion of large format stores in the “small box” field, which is highlighted by many as the main Dollar General differential. Due to dollar stores’ high performance over the past years, Wal-Mart Stores, Inc. (NYSE:WMT) has started to target Dollar General stores by opening small Neighborhood Markets and Express stores and offering “price comparison” policies (that aim to offer lower prices than its competitors).

Alongside Wal-Mart Stores, Inc. (NYSE:WMT), Family Dollar and Dollar Tree have implemented aggressive expansion plans over the last years, fiercely competing for market dominance across diverse areas of the US. These last businesses are the concerning ones; the real competition, according to various analysts (i.e. Credit Suisse) is happening within the Dollar Stores trade (see table 3). Although there is some overlapping between Dollar Stores, this won´t prevent further expansion considering that their share of the $900+ billion U.S. consumables industry is only about 3%. Each company in the Dollar Stores segment believes that the opportunity for additional expansion is significant.

Competitiveness could also be highly affected by government decisions.
Dollar General’s performance is vastly influenced by the payroll tax cut implemented in 2011 and the distribution of food stamps
(which represent around 5% of the stores’ sales). Cuts and set-backs in these policies would importantly impact the company’s profit.

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