Here's How Dollar General Is Doing So Far This Year

Summary

• New stores and increased customer traffic resulted in solid fundamental expansion.
• Dollar General possesses a reasonable amount of long-term debt.
• Dollar General has expanded its fundamentals at a solid pace over the past five years rewarding its shareholders in the process.

On Dec. 4, discount dollar chain Dollar General (NYSE: NYSE:DG) came out with its Q3 2014 earnings announcement and 10-q. The company clocked in excellent performance in 2014. Let's take a look to see what's happening with the company.

Solid fundamental expansion

Dollar General saw its year-to-date revenue, net income and free cash flow increase 7%, 1%, and 74%, respectively. Year-to-date same store sales increased 2.1% year-over-year. Moreover, customer traffic increases and expansion in the amount spent contributed to top line expansion. The company opened 617 new stores so far this year adding to the revenue expansion. This goes to show that the company knows how to bring in customers. More traffic equates to more opportunities to make a sale.

Dollar General's year-to-date net income increased 1%. Markdowns, inventory clearance, and higher sales of lower margin items such as tobacco and perishable products helped lower gross profit serving as a drag on year-to-date net income growth. Expenses pertaining to the attempted Family Dollar acquisition and increases in rent, utilities and incentive compensation also served as a drag on net income growth.

Dollar General's year-to-date free cash flow increased 74%. This was helped by the 11% increase in operating cash flow which was made possible by favorable changes in its assets and liabilities, especially accounts payable. Capital expenditures also declined 35% while disposal of plant, property and equipment increased 67%.

Balance sheet

Dollar General possesses an ok balance sheet. Its $216 million in cash equated to 4% of stockholder's equity. I like to see companies with cash amounting to 20% or more of stockholder's equity to get them through tough times and self-finance acquisitions. Dollar General's $2.7 billion in long-term debt equates to 50% of stockholder's equity which is right at my personal threshold. Long-term debt creates interest which chokes out profitability and cash flow. So far this year, Dollar General's operating income exceeds interest expense by a comfortable 18 times. The rule of thumb for safety lies at five times or more.

How does this fit into the bigger picture?

Dollar General has clocked in solid growth over the past five years. Dollar General has grown its revenue, net income, and free cash flow 57%, 204%, and 116% respectively over the past five years. This translated into a total return of 208% for Dollar General shareholders vs. 99% for the total return of the S&P 500.

DG Revenue (NYSE:TTM) data by YCharts

DG Total Return Price data by YCharts

Looking ahead

If Dollar General manages to acquire Family Dollar it would add to Dollar General's economy of scale and make it a force to be reckoned with in the retailing world. This would allow Dollar General to profitably lower prices and compete with big box retailers. Excluding that, Dollar General wants to add 730 new stores, remodel 875 established stores and add a new distribution center in Texas in 2015. Management is definitely not sitting on their laurels. The company estimates that it will add 6% to its square footage. The company's stock trades at a reasonable valuation given its dynamism. According to Morningstar, Dollar General trades at a P/E ratio of 20.9 vs. 18.7 for the S&P 500 and 19.7 for the company's five year average. Investors may want to take a small position while adding more shares during corrections.

Analyst’s 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.