Dollar General (NYSE:DG) has been sold off with the rest of retail stocks. The company has its own niche and does not compete with online retailers. Dollar General can also compete head to head with Wal-Mart (NYSE:WMT).
First a little background on financials. The stock trades for $70.825, there are 275 million shares, and the market cap is $19.5 billion. The dividend is $1.04 and the dividend yield is 1.47%. Earnings per share are $4.45 and the price to earnings ratio is 15.9. Free cash flow is $1.05 billion and the free cash flow yield is 5.4%. With that free cash flow, management has been increasing the dividend and buying back shares.
There is about $3.2 billion in debt and only $188 million in cash. S&P rates the company's debt at BBB. I'd agree with that rating. Return on equity is a whopping 23.2% and the profit margins 5.7%. Revenues increased from $18.9 billion in 2015 to $22 billion last year. Earnings grew from $1.065 billion to $1.251 billion over that time frame.
Dollar General operates 13,429 stores in 44 states. The company has 14 distribution centers and plans to open 900 new stores in 2017. Last summer the company bought 41 Wal-Mart Express stores. In April, 323 Dollar Express stores were purchased in 36 states. So the company is growing through acquisitions, opening hundreds of new stores, and building distribution centers every year. Looking at the press releases on the corporate web site will give you a narrative of what has been going on for the last few years.
So why is the stock so cheap? It's been sold off with the rest of retailers. Sears (NASDAQ:SHLD), JC Penney (NYSE:JCP), Macy's (NYSE:M) have been getting killed by Amazon (NASDAQ:AMZN). The mall operators have been getting killed too.
So why hasn't Dollar General done poorly like the rest of retail? Several reasons. The first is that the company sells lower end products like tooth-paste, toilet paper, soda pop, etc. 76.4% of sales are consumables, 12.2% seasonal, 6.2% home, and 5.2% apparel. People aren't going buy a four-roll of toilet paper online.
Can Dollar General compete head to head with Wal-Mart (WMT)? Yes. There is a myth that Dollar General is in towns without Wal-Mart. That's partially true but Dollar General has a big advantage that Wal-Mart does not-convenience. It takes probably 20 minutes to get in and out of Wal-Mart. Imagine if you want that four-roll of toilet paper? It takes about five minutes to get in and out of Dollar General.
I'll give you a real life example--Independence, Missouri. It's a suburb of Kansas City and has a population of 117,000. Wal-Mart is there, Wal-Mart Neighborhood Market, grocery stores, CVS (NYSE:CVS), Walgreens (NASDAQ:WBA), and of course Dollar General. Dollar General has its niche. It's faster than Wal-Mart, doesn't have fresh food like the grocery stores, but has some items that are inexpensive and needed. You'd be foolish to do all of your shopping there but unfortunately, some people do. That reflects the poor eating habits of some Americans.
The four major shareholders are T.Rowe Price (11.1%), GIC (8.8%), Blackrock (7.9%), and Vanguard (6.8%). With a little more digging, you might find that mutual funds and exchange traded funds focusing one retail were holders and have been witnessing their assets shrink from redemptions from shareholders who are afraid of retail (and rightly so).
Dollar General is a buy. It's about where Wal-Mart was in 1990. It has plenty of room to grow. The major risk is a slowdown in the economy. Dollar General would be affected but less so. In economics, an "inferior good" is something that does well in hard times. More people eat hamburger instead of steak, or so the theory goes. Dollar General fits this bill. For the stock's valuation and the company's growth outlook, the shares are worth owning.
Disclosure: I am/we are long DG.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.