Dollar General Reports Strong 2012 Results

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Dollar General reported decent fourth-quarter results and guided for 10%-12% top-line growth, 4%-6% samestore sales growth, and 8%-13% earnings per share growth in 2013. The guidance for top-line growth was ahead of expectations, but management’s profit growth expectations were in line with analysts’ forecast.

The key to the Dollar General equity story is retaining the consumers gained during the 2008 recession and mitigating the eventual impact from Wal-Mart’s small-store rollout. Analysts still forecast Dollar General to increase market share and generate returns above its cost of capital, but we caution that the significant capacity being added to the sector by Wal-Mart and other dollar stores will eventually pressure sales and profit margins over the long term.

Dollar General does not possess an economic moat, largely because consumer switching costs are negligible, and it could be difficult for the company to offset Wal-Mart’s scale advantages and $6 billion in planned price cuts over the next five years. Given these competitive threats, as well as the potential near-term downside that could result if cuts are made to government assistance programs, investors should consider waiting to purchase Dollar General shares at a greater margin of safety.

Fiscal 2012 sales increased more than 10% (excluding the impact of an extra week in 2011), while an increase in traffic and average transaction price helped to drive a comparable same-store sales increase around 4.7%. The strong comp was primarily driven by an increase in consumable items, including snacks and beverages. In addition to the strong comps, Dollar General opened 625 new stores in 2012, bringing its total store count to more than 10,500 and increasing square footage around 7%.

Analysts’ current forecast is for the dollar stores (Dollar General, Family Dollar, and Dollar Tree) to add around 1,100 stores annually over the next several years, which should support top-line growth. The dollar stores should also be able to leverage fixed costs once these stores are fully operational. However, Dollar General and its peers will likely reinvest these proceeds to remain competitive on price, which could ultimately pressure gross and margins over the long term.

 

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