Dollar General Should Hit It Out Of The Park This Quarter

| About: Dollar General (DG)
This article is now exclusive for PRO subscribers.


DG’s growth momentum has already blasted through Black Friday weekend.

DG’s guidance and analyst estimates may be far too conservative.

January was typically one of its seasonally superior months, but last year was killed by the weather. Hence, this January’s sales should be an easy comp.

Cheap gas prices and cheap retail prices are the obvious reason Dollar General (NYSE:DG) should excel this holiday season. Everybody pretty much knows that and expects that. But could it be even better than everybody expects? I say yes, with some hints in the most recent conference call that spell why.

First, I'll start with some of the more obvious. DG last quarter bagged its 27th quarter in a row of positive same-store sales. With the quarter over one-third over, in the earnings release CEO Rick Dreiling stated:

We are seeing a significant step up as we start the holiday season, and we expect to achieve same-store sales growth of approximately 5 percent for the fourth quarter.

He further shared in the conference call that the momentum during the third quarter picked up throughout the quarter and carried into the current period.

During the Q&A, Dreiling actually played down the benefit of gas prices positively affecting DG's business so far. He mentioned it takes a while for consumers to realize they are saving money and adjust their spending habits. In the meantime the company is actively flooding its stores with key new items priced under $5 and under $1 which are finding excellent popularity. But here is where it gets particularly interesting. Deep into the Q&A, Dreiling stated,

If you look at January Paul of last year and I think we called it out on the conference call for the fourth quarter. We came to work and had a thousand stores shutdown in several locations, right. And we dealt with a very, very, very weak January last year. January historically is one of our better months, better periods of the year.

In other words January is seasonally one of the best months of the year but the year-ago period it was relatively a disaster thanks to the storms. Assuming this season isn't another once-in-decades type event, DG should have an easy comp period. DG also suffered last year with some bad weather and closings during the vital week before Christmas shopping period.

Dreiling used the terms "cautious" and "cautiously optimistic" a total of three times in the call. This implies he may have been hedging his guidance a bit due to the unknowns of weather which leaves us as investors with two options in my opinion: Start accumulating DG with anticipation of a more mild winter and more robust sales above and beyond what DG guided or wait until we have more confirmation that a more mild winter has indeed happened then accumulate DG ahead of the report.

Right now analysts are pricing around a 10% increase in sales compared to an 8% increase in the sequential last quarter. Considering same-store sales are guided to be nearly double the growth of last quarter and could be even higher, and DG is continually opening new stores, analysts themselves may be estimating too cautiously.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.