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Summary

  • Dollar General suffered from harsh weather as well in the first quarter.
  • Despite soft first quarter results, the company maintains a strong full year outlook.
  • Shares continue to offer appeal for growth-oriented investors on dips.

Dollar General (NYSE:DG), the largest US discount retailer with over 11,000 stores, reported its first quarter results on Tuesday. The company, which offers quality private and national brands, released soft first-quarter results, but shares rose as the company backed its full-year outlook.

I am a buyer on dips in this growth name.

First Quarter Headlines

Dollar General reported first-quarter revenues of $4.52 billion, which is up 6.8% on the year before.

The company posted net earnings of $222 million, up $2 million compared to last year. Reported GAAP earnings jumped by five cents to $0.72 per share on the back of sizable share repurchases.

The topline results were soft compared to consensus estimates, with analysts looking for earnings of $0.73 per share on revenues of $4.56 billion.

Looking Into The Quarter

As should be known by now, the first quarter was very difficult for retailers due to the harsh weather circumstances. Still, Dollar General managed to squeeze out same store sales growth of 1.5%. Both a modest increase in traffic and in the size of transactions resulted in the reported same store sales growth.

Interesting to note, given the continued pressure on discretionary spending in the middle and lower class, Dollar General actually reported much stronger growth in the consumable category. This includes tobacco sales, perishables and snacks, among others.

Gross margins did face some pressure, falling by 57 basis points to 30.0% of total sales. Markdowns have been higher in a tough pricing environment, while better consumables tend to carry lower margins.

Selling, general & administrative expenses were up by 37 basis points to 21.6% of sales. Rent and utility costs were up significantly, as slow comparable store sales growth failed to provide operating leverage tailwinds.

Outlook For The Year

Despite softer first-quarter results, Dollar General expects sales to grow by 8-9% for the entire year which is driven by expected comparable store sales growth of 3 to 4%. Underlying the assumption is also 700 new store openings and the relocation or remodeling of another 500 stores.

If all goes according to plan, Dollar General expects to post earnings between $3.45 and $3.55 per share.

The fact that the company continues to foresee full-year comparable store sales of 3-4% for the year is a very strong sign. This implies that comparable store sales are seen up between 3.5% and 4.8% in the remaining three quarters of the year, which would be quite an achievement.

Valuing Dollar General

Dollar General held just $166.3 million in cash and equivalents at the end of the quarter. Total debt and capital lease obligations stand at $3.11 billion, which results in a net debt position which is approaching $3 billion.

Trading around $56.50 per share, Dollar General's equity is valued around $17.5 billion. This values equity in the business at 0.9 times annual revenues expected for this year and roughly 16 times GAAP earnings.

Dollar General does not pay a dividend to investors. Instead it returns cash through share repurchases after buying back 14.1 million shares for $800 million in the first quarter.

The company has another $223 million in share repurchases being authorized at the moment. As a result of these repurchases, the company has managed to reduce the share count by little over 5% over the past year.

Takeaway For Investors

Investors were initially not pleased with the soft headline results, although some might have feared for worse figures to hit the news wires. Consumable sales, which includes tobacco sales, were solid after CVS Caremark (NYSE:CVS) decided to quit selling tobacco products earlier this year.

The move by CVS was generally applauded by the investment community despite the short term impact on sales. Even President Obama applauded CVS for making the move. The $2 billion in annual tobacco sales being forfeited by CVS will be picked up by competitors, including Dollar General which pushed up consumables sales over the past quarter.

Therefore, the outlook for the second half of the year is comforting, as margins are expected to rebound and comparable store sales growth is anticipated to improve. Part of this push to drive sales and margins is the focus on more profitable products like accessories which range from $1 to $5 per item.

The full-year revenue and earnings outlook was in line with consensus estimates, implying that the company believes it can ¨catch-up¨ during the remainder of the year. Combined with a solid pace of new store openings, topline growth should once again come in at 8-9% which is in line with its past 9-year CAGR of 9.7% growth in annual revenues.

Margins have been under pressure in the first quarter as well given the promotional environment which requires the company to be very aggressive in its pricing to prevent customers running towards competing firms like Family Dollar (NYSE:FDO) as well as to established and bigger giants like Wal-Mart (NYSE:WMT) and Target (NYSE:TGT). With Dollar General focusing on some higher-priced categories and retail spending in general recovering after the harsh winter, these margin pressures should be reduced during the rest of the year.

Shares continue to be appealing enough to be part of your portfolio given the growth profile of the operations and the fair valuation. The company trades at 16 times earnings, a slight discount to the general market while having demonstrated solid earnings growth over the past decade, outpacing that of the market.

Therefore, I am a buyer around the $55 level at the moment.

Source: Dollar General - Appeal Remains As Growth Continues