Seeking Alpha
Research analyst, long/short equity
Profile| Send Message| ()  

A P/E ratio of 19.28x: That's how Dollar General (DG) is valued in the market. This seems to be high at first, comparing with the 12.04x of Wal-Mart (WMT) and 12.27x of Target Corp (TGT). But, hey, nothing is so simple in finance and investment. If it seems Dollar General is valued highly, just put it next to Costco Wholesale Corporation (COST) and Dollar Tree (DLTR).

Well, if you have read my recent article on Dollar Tree, you would know that there are reasons why the market is optimistic about Dollar Tree. I would need to do proper research on Costco Wholesale to give my opinion on that. But for the time being, let's focus on Dollar General.

Dollar General has recently reported strong second-quarter financial results. The very first thing to note is that earnings per share (EPS) improved to $0.52 this quarter, compared to $0.42 in the same period last year -- the first sign of growth of the largest discount retailer in the United States.

Total sales have gained 11.2% to $3.58 billion this quarter in 2011, compared to $3.21 billion in the same period last year. Same store sales have gone up by 5.9% this quarter, compared to 5.1% in the same quarter last year. The same-store sales growth was recorded at 4.9% in FY2010. Things are getting better, and it will get even better when the economy picks up a little more. Consumable goods showed considerable and consistent increase in sales, while luxurious and non-consumable goods showed a bit of slack due to selected spending by the customers.

This inclination toward consumables led to a declining gross profit margin of 32.1% in Q2 2011 from 32.2% in Q2 2010. Moreover, the costs of goods sold increased due to higher fuel costs and commodity prices, although decreased markdowns, higher goods prices, improved inventory shrinkage process and decreased distribution costs offset the higher purchase prices significantly.

Operating income increased 16% to $350 million, as compared to $301 million in the same quarter last year. Part of this is to be credited to the decreased SG&A costs, which was recorded at 22.3% (percentage of sales) last quarter as opposed to 22.9% same quarter last year.

One of the most notable highlights of the report was the decline in the interest expenses, which was registered at $60.7 million last quarter, $8 million less than that in the same quarter last year. This is due to the fact that substantial amount of borrowings were being bought back by the company and also for the lower interest rates due to positive notional result on interest rate swap.

In fact, the company again redeemed the remaining $839 million of outstanding aggregate principal amount of its 10.625% senior using excess cash and refinancing facility. The previous amount of 10.625% senior notes was worth $25 million principal amount in the open market in April this year. This resulted in a total loss of around $60.3 million ($36.7 million loss, net of income taxes or $0.11 loss per share). But it helped decrease the total long-term obligations by $572 million during the last twelve months. I believe this should play a big role in deciding the bottom-line of the company in the coming quarter this year.

Moreover, in addition to all these, Dollar General is all set to launch its e-commerce site by the beginning of this September. Along with over 9,500 stores in over 35 states, this site will be the complementary online shopping platform for the customers. "Dollar General is excited to meet the growing demand for online convenience and value," said Rick Dreiling, Dollar General's chairman and CEO. "We have streamlined the online shopping experience, giving customers what they need, as well as what they want, 24 hours a day, seven days a week, 365 days a year.

In fact, some of the items will be unique to the e-commerce site and not available in stores. That sounds like a good plan to me: convenience and value – both at the same time. This is just when the eCommerce industry is riding its peak, and the move should add to the top line of the company.

Dollar General definitely shows a lot of promise, and it might be a good investment at this time.

Source: Dollar General Is Worth Its Valuation And Remains An Attractive Buy