Company Reports

Dollar General’s more than 20,000 small-box locations make the retailer an omnipresent force in rural communities that lack national retail chains. The firm provides low-income households (a typical customer earns around $40,000 per year) with a convenient fill-in shopping destination and reasonable price points on merchandise, which we view as the crux of its value proposition. Since thinly populated and less affluent towns cannot economically support an abundance of retailers, Dollar General thrives by leaning into areas with minimal competition. Furthermore, its impressive scale and proximity to consumers, product mix that is 80% consumables, and small basket size (usually around $15) help insulate the retailer from e-commerce competition.

Narrow-moat Dollar General delivered fiscal 2024 first-quarter results that slightly exceeded our expectations. However, we do not plan to significantly alter our $145 fair value estimate, as signs of intensifying price competition should remain a headwind to margins.

Dollar General’s over 20,000 small-box locations make the retailer an omnipresent force in rural communities that lack national retail chains. The firm provides low-income households (a typical Dollar General customer earns around $40,000 per year) with a convenient fill-in shopping destination and reasonable price points on merchandise, which we view as the crux of its value proposition. Since thinly populated and less affluent towns cannot economically support an abundance of retailers, Dollar General thrives by leaning into areas with minimal competition. Furthermore, its impressive scale and proximity to consumers, product mix that is 80% consumables, and small basket size (usually around $15) help insulate the retailer from e-commerce competition.

Narrow-moat Dollar General's fiscal 2023 fourth-quarter results exceeded our depressed expectations, though shares slid about 5% amid management's mention of continued margin pressure and a more promotional retail environment in fiscal 2024. Same-store sales expanded 0.7% when we'd anticipated a low-single-digit decline. This helped reverse two straight quarters of declines, as a strong 4% uptick in volume offset softness in average ticket. While we're encouraged by the improvement, we note the firm's core low-income consumer continues to grapple with reduced fiscal stimulus and inflationary pressures, which we believe is evidenced by the mid-single-digit percentage sales decline across its discretionary product categories for the full year (though we look favorably upon the 4% gain in consumable sales). Operating margin of 5.9% for the quarter came in about 50 basis points ahead of our forecast. This still represented a 320-basis-point decline from the prior year as the retailer resorted to discounting excess inventory (positively, nonconsumable inventory per store fell 21%), completed its $150 million investment to add store labor hours, and faced headwinds related to shrinkage.

Dollar General’s over 19,000 small-box locations make the retailer an omnipresent force in rural communities that lack national retail chains. The firm provides low-income households (a typical Dollar General customer earns around $40,000 per year) with a convenient fill-in shopping destination and reasonable price points on merchandise, which we view as the crux of its value proposition. Since thinly populated and less affluent towns cannot economically support an abundance of retailers, Dollar General thrives by leaning into areas with minimal competition. Furthermore, its impressive scale and proximity to consumers, product mix that is 80% consumables, and small basket size (usually around $15) help insulate the retailer from e-commerce competition.

As expected, narrow-moat Dollar General continued to absorb the effects of abating fiscal stimulus and cumulative inflationary pressures that have pinched the wallets of its core low-income consumer. Same-store sales dropped 1.3% during the third quarter as shoppers tapered spending across each merchandise category, with the pullback most pronounced in nonconsumable areas like home products and apparel. Encouragingly, while average ticket suffered, management noted an increase in store traffic and cited sequential improvement throughout the quarter. Also as expected, Dollar General posted a weak operating margin of 4.5%, down 330 basis points over the prior year. Margins primarily suffered from elevated markdowns to clear inventory, with management saying nonconsumable inventory per store is down 19% over the prior year. Other factors included investments to improve labor hours (the firm is on track to allocate $150 million to additional store labor hours), and cost deleverage from weaker sales. We expect to see continued markdowns and investment at the store and supply chain level as CEO Todd Vasos, in his first quarter back at the helm after a brief hiatus, emphasized rationalizing the firm's portfolio of stock-keeping units, driving distribution productivity, and improving the store environment that we suggest has suffered from underinvestment.

We've lowered our fair value estimate for narrow-moat Dollar General to $140 per share from $179 due to a significant pullback in our profitability expectations for the next several years and a more subdued midcycle operating margin forecast of 8.2% (from 9.0%). However, we still think the stock, trading at around a 15% discount to our intrinsic valuation, offers an attractive risk/reward.

Dollar General’s 19,000-plus small-box locations make the retailer an omnipresent force in rural communities that lack national retail chains. The firm provides low-income households (a typical Dollar General customer earns around $40,000 per year) with a convenient fill-in shopping destination and reasonable price points on merchandise, which we view as the crux of its value proposition. Since thinly populated and less affluent towns cannot economically support an abundance of retailers, Dollar General thrives by leaning into areas with minimal competition. Furthermore, its impressive scale and proximity to consumers, product mix that is 80% consumables, and small basket size (usually around $15) help insulate the retailer from e-commerce competition.

Narrow-moat Dollar General announced the departure of Jeff Owen as CEO on Oct. 12, with his predecessor Todd Vasos returning to the role for the foreseeable future. The press release said the move was effective immediately and designed to “restore stability and confidence.” The market reacted positively to the news, with shares jumping 8% in afterhours trading. The firm also modestly lowered its fiscal 2023 financial targets, though not enough to affect our $179 fair value estimate meaningfully. We maintain our Standard Capital Allocation Rating for the name and are increasingly confident that the firm will address the most glaring underinvestment issues (as exposed in recent media reports) after the leadership change.

Despite intensifying competition that we believe is diminishing its competitive edge, Dollar General's advantageously located store network, low-priced items, and scalable supply and distribution capabilities should allow it to continue to create economic value. With a footprint focused on thinly populated areas that cannot support numerous retailers, and with small basket sizes (over 80% of items are priced at or below $5) that blunt pressure from e-commerce competitors, we expect Dollar General to effectively deliver the convenience and affordability that its generally modest-income (roughly $40,000 annually, as a household) customers demand.

For the second straight quarter, narrow-moat Dollar General posted lackluster earnings, cut its guidance, and was punished by the market for its shortcomings. The firm's core customer remains under pressure, acutely sensitive to sticky inflation in nondiscretionary expenses, and pulled back on purchases in the more cyclical seasonal (negative 1%), home goods (negative 7.7%), and apparel (7%) categories in response. While we expect to lower our own $191 intrinsic valuation by a mid-single-digit percentage—consistent with higher-than-expected shrink, a 2.25% reduction in full-year revenue guidance at the midpoint (to 1.3% to 3.3% from 3.5% to 5%), and a material downgrade in expected profitability—we continue to view issues as ephemeral rather than structural and see significant long-term opportunity in the name.

Despite intensifying competition that we believe is diminishing its competitive edge, Dollar General's advantageously located store network, low-priced items, and scalable supply and distribution capabilities should allow it to continue to create economic value. With a footprint focused on thinly populated areas that cannot support numerous retailers, and with small basket sizes (over 80% of items are priced at or below $5) that blunt pressure from e-commerce competitors, we expect Dollar General to effectively deliver the convenience and affordability that its generally modest-income (roughly $40,000 annually, as a household) customers demand.

Despite intensifying competition that we believe is diminishing its competitive edge, Dollar General's advantageously located store network, low-priced items, and leverageable supply and distribution capabilities should allow it to deliver economic returns. With a footprint focused on thinly populated areas that cannot support numerous retailers and make shipments to homes costly for a small basket (over 80% of items are priced at or below $5), we expect Dollar General to use its burgeoning scale and proximity to customers to economically deliver the convenience and affordability that its generally modest-income (roughly $40,000 annually, as a household) customers demand.

Our $211 per share valuation of narrow-moat Dollar General should fall by a high-single-digit percentage after it announced soft first-quarter earnings and slashed guidance, with the economic environment weighing on results. Shoppers' pullback on discretionary spending continued at a faster pace than anticipated, with Dollar General's same-store sales performance sharply bifurcated (4.3% growth in consumables, 8.5% decline in nonconsumables, 1.6% overall growth). With the firm's underperformance linked to transitory macroeconomic factors, our long-term forecast should not change much (mid-single-digit percentage yearly top-line growth, high-single-digit operating margins, on average). We attribute the difference between our more muted take on the announcement and the shares' roughly 20% trading price plunge to our focus on the company's longer-term dynamics. We believe the shares are modestly attractive for long-term investors comfortable with the near-term volatility.

Despite intensifying competition that we believe is diminishing its competitive edge, Dollar General's advantageously located store network, low-priced items, and leverageable supply and distribution capabilities should allow it to deliver economic returns. With a footprint focused on thinly populated areas that cannot support numerous retailers and make shipments to homes costly for a small basket (over 80% of items are priced at or below $5), we expect Dollar General to use its burgeoning scale and proximity to customers to economically deliver the convenience and affordability that its generally modest-income (roughly $40,000 annually, as a household) customers demand.

Dollar General's Feb. 23 preliminary release quenched any speculation about its fiscal 2022 fourth-quarter earnings, leading investors to focus on 2023 guidance during the March 16 call. As we digest more specific commentary around higher capital, operational, and debt-servicing expenditures in 2023 than our prior forecast, we expect to trim our $212 fair value estimate by a low-single-digit percentage, rendering shares fairly valued.

We don’t plan any material change to our $212 per share fair value estimate for narrow-moat Dollar General after digesting preliminary fourth-quarter results that were softer than expected. But after a mid-single-digit rout in the share price, we view the stock as fairly valued. Fourth-quarter same-store sales growth of 5.7% was a touch below our 7% projection and the firm’s 6%-7% outlook, but the updated EPS forecast of $2.91-$2.96 was 9% below the midpoint of the prior range ($3.15-$3.30) and our implied $3.25 estimate. Fortunately, the shortfall is not due to fundamental weakness in the business, but rather from the idiosyncratic impact of Winter Storm Elliott, which strangled the northern U.S., hindering sales and prompting increased damages to inventory. Given the transitory nature of weather events, we don’t think this affects the durability of Dollar General’s brand asset or cost edge.

Despite intensifying competition that we believe is diminishing its competitive edge, Dollar General's advantageously located store network, low-priced items, and leverageable supply and distribution capabilities should allow it to deliver economic returns. With a footprint focused on thinly populated areas that cannot support numerous retailers and make shipments to homes costly for a small basket (over 80% of items are priced at or below $5), we expect Dollar General to use its burgeoning scale and proximity to customers to economically deliver the convenience and affordability that its generally modest-income (roughly $40,000 annually, as a household) customers demand. The COVID-19 pandemic lifted sales, but we do not expect it to have a material long-term effect on the chain’s standing.

Our $227 per share valuation of narrow-moat Dollar General should fall by a high-single-digit percentage, near the trading price’s reaction, after it announced third-quarter earnings affected by greater-than-anticipated cost pressures. We see the drivers of the margin underperformance (elevated supply chain costs, a mix shift to consumable goods, product cost inflation, and shrink) as transitory, so our long-term forecast is intact (mid-single-digit percentage yearly top-line growth, high-single-digit operating margins, on average). We suggest investors seek a more attractive entry point as the trading price does not afford a margin of safety.

Despite intensifying competition that we believe is diminishing its competitive edge, Dollar General's advantageously located store network, low-priced items, and leverageable supply and distribution capabilities should allow it to deliver economic returns. With a footprint focused on thinly populated areas that cannot support numerous retailers and make shipments to homes costly for a small basket (over 80% of items are priced at or below $5), we expect Dollar General to use its burgeoning scale and proximity to customers to economically deliver the convenience and affordability that its generally modest-income (roughly $40,000 annually, as a household) customers demand. The COVID-19 pandemic lifted sales, but we do not expect it to have a material long-term effect on the chain’s standing.