With all the drama surrounding the Dollar General (NYSE:DG) attempts to outbid Dollar Tree (DLTR) on a takeover of Family Dollar (FDO), it's easy to forget regardless of the outcome DG is an awesome business on its own. Last quarter, for instance, DG celebrated its 26th quarter in a row of positive same-store traffic and sales despite the budget-strapped consumer headwind. DG reports next on Dec. 4 and all signs suggest it will be the 27th quarter in a row of excellence.
As mentioned, DG has a credible track record of success for 26 consecutive quarters now. Last quarter was another decent one with sales up 7.5% and same-store sales up 2.1% but CEO Rick Dreiling cautioned as they moved throughout the quarter the consumer got more cautious. However, for the first month (August) of the new quarter about to be reported momentum picked back up again. Tobacco sales most notably are beginning to pick up speed, and I have to wonder if that's in part due to CVS (CVS) eliminating its Tobacco sales from its stores.
Then you have the imploding gas prices. No group benefits more from lower gas prices than lower income folks who find gas to be a higher percentage of their budgets than most other people. DG tends to appeal to these folks due to its prices being even cheaper than Wal-Mart.
During the conference call, CFO David Tehle stated, "As you model your earnings for the third and fourth quarter, please keep in mind that we expect stronger earnings per share growth in the fourth quarter as compared to the third quarter due to the easing of the comparisons." Is this is signal of a blowout ahead? I'm not sure necessarily about that, but it does seem like the downside risk is minimal given the matter-of-fact confidence of the statement.
Dreiling added, "All-in, we expect our sales improvement to continue as we move through the year and quarterly comparisons continue to ease." He also pointed out that in the year-ago period there was a government shutdown that didn't repeat this year for the quarter which will make the comp fairly easy to beat. As a bit of a wild card Dreiling also stated, "We'll be making a big splash with our customers in late September with a promotion entitled Fast Way To Save to drive awareness and enrollment. Over time, we believe this exciting program will drive shopper engagement."
Then there is another aspect of cheap fuel prices that nobody seems to be talking about with retailers like DG. These guys have to spend money on fuel to move goods too. For example, in DLTR's conference call on Nov. 20, CFO Kevin Wampler mentioned that if diesel prices stay down $1 per gallon average for a full year compared to the prior year it would add $0.10 per share in earnings to DLTR just from their own internal costs of transportation of the company's merchandise. You have to figure DG will see some material benefit as well.
Bottom line, I don't believe going long DG will make you rich in the short term, but the risk of disappointment with the upcoming report seems to be outweighed by the potential of a small positive surprise in terms of sales, earnings, or outlook. I plan to go long DG ahead of earnings.
