Today, we put retailer Dollar General (NYSE:DG) in the spotlight. The company should marginally benefit from the recent bankruptcy of 99 Cents Only which put 371 stores in liquidation and which Dollar General overlaps with nicely. The stock has also rebounded some 40% from its lows in late October during the most recent market downdraft. However, the stock is down slightly over 10% since the company reported Q4 numbers in Mid-March. In addition, headwinds remain for low end retailers and the stock has seen some insider selling here in April. What is the prognosis for Dollar General in the months ahead? An analysis follows below.
Dollar General is headquartered in Tennessee and its retail locations are primarily located in the southern, southwestern, midwestern, and eastern regions of the United States. Its stores provide a large variety of consumable and perishable products at low prices. The stock currently trades around $145.00 a share and sports an approximate market capitalization of just south of $32 billion.
Recent Results:
The company reported is Q4 2023 results on March 14th. Dollar General delivered a GAAP profit of $1.83 a share, a dime a share above expectations. For the year, earnings fell 29% from FY2022's levels to $7.55 a share. Sales in the fourth quarter fell 3.4% on year-over-year basis to $9.9 billion, which exceeded the consensus by some $120 million. Same store sales rose 0.7% from the same period a year ago that contained one more week and falling sales also incorporated some store closures, it should be noted. For FY2023, same store sales increased .2%.
For FY2024, management provided initial sales guidance calling for an increase of 6% to 6.7%, which will be driven by same store sales growth of 2.0% to 2.7% as well as additional store openings. Leadership also expects GAAP earnings of between $6.80 to $7.55 a share in FY2024 and plans to spend between $1.3 billion to $1.4 billion in CapEx in the current fiscal year.
Balance Sheet & Cash Flow:
One of the more impressive things about Dollar General's FY2023 performance was that free cash flow increased just over 20% on a year-over-year basis to $2.4 billion. That gives the stock a free cash flow yield of 7.5% on FY2023's performance. The company's operating performance was negatively impacted by interest expense which rose nearly 55% on a year-over-year basis to $327 million. The company listed just over $535 million worth of cash and marketable securities on its balance sheet at the end of FY2023 according to the 10-K it filed for the fiscal year. Dollar General also listed long-term obligations of just north of $6.2 billion.
Positive Trends:
The company should benefit from the big fall in inflation levels, even as inflation has become quite 'sticky' so far in 2024. In addition. Dollar General should be the beneficiary of more and more consumers 'trading down' as over 60% of Americans report living 'paycheck to paycheck' according to recent surveys.
Negative Trends:
Pretty much everything 99 Cent Stores cited for their reasons for closing up shop can apply to Dollar General. These included 'the impact of COVID-19, shifting consumer demands, inflation and rising shrinkage levels such as loss of inventory or cash due to theft'.
Valuation:
Dollar Geneal made $7.58 a share in FY2023 on $38.9 billion in sales. The current analyst consensus has profits falling to $7.25 a share in FY2024, even as revenues rise to $41 billion. This follows the profit decline of nearly 30% the company experienced in FY2023. They do see profits rebounding to $8.26 a share in FY2025 on sales growth of six percent. That leaves the shares trading at 20 times FY2024E EPS. The shares pay just over a 1.6% annual dividend yield. The shares sold for approximately 13 times forward earnings at the recent low in late October as comparison.
Conclusion:
Given the challenges of the retail environment, DG at 20 times forward earnings in a year that profits are expected to decline by five percent hardly seems a bargain. Especially given the profit decline in FY2023. One insider sold nearly $960,000 on April 4th at just over $162.00 a share. A week later, a different insider sold nearly $470,000 at just over $155.00 a share. Prior to that, the last insider activity was in mid-March where a company director purchased just over $110,000 worth of shares at a tad over $130.00 a share. That probably serves at a much better level to establish any sort of position in DG, if not lower. A range of $110 to $120 would denote an approximate valuation of 15-16 times forward earnings, which seems a more reasonable entry point. In ways of comparison, competitor Dollar Tree, Inc. (DLTR) trades at just under 18 times FY2024E EPS and profits are projected to grow in the high teens this fiscal year. A director and the company's CFO have also bought just over $370,000 worth of stock collectively in DLTR over the past month as well.
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