Dollar General: Investors Can Expect Better Times Ahead

Dollar General (DG) reported decent numbers in its recently reported second-quarter results, with year over year growth in both revenue and profits. The deep discount retailer got a boost from tobacco products, perishables, health care items, and snacks and candy. As a result of increased customer traffic, coupled with higher-dollar transaction amounts, its same store sales rose 2.8%.

Its revenue for the quarter rose 8.1% from the year-ago period to $5.1 billion, while earnings increased to 95 cents per share, a jump of 14% from the same period last year.

Analysts, on the other hand, were expecting an EPS of 81 cents on revenue of $5.14 billion. Also, its gross profit margin widened 45 basis points to 30.5%.

Will Dollar General be able to continue getting better?

Dollar General reported strong results last quarter, but in the wake of fierce competition, the retailer needs to put in a lot of effort to keep the momentum going. Consequently, last year the company had launched its labor investment program at select locations. Under this program, employees will have to work more hours in order to ensure the proper stacking of shelves, which is ultimately intended to enhance customer satisfaction. Pleased by the encouraging results, Dollar General will continue with its plan and more stores would be incorporated under this scheme.

The main objective of this initiative is to reduce the truck to shelf time for merchandising the stores, which will further support its goal to provide its consumer with the right product at the right time and at the right price. Additionally, Dollar General has also been testing a number of inventory management initiatives for the past several months.

For instance, a new sky shelf program has been rolled out across the third of the chain to allow for the placement of inventory directly above respective categories, and this move will consequently improve labor efficiencies. According to COO Todd Vasos, "We believe these labor investments and inventory management initiatives are significant steps to improving our in-stock position which is critical component of our overall consumer satisfaction and a driver of sales performance."

Going forward, analysts are optimistic about its future performance. RBC Capital has upgraded the stock to outperform, citing "Labor and wage trends for lower/middle-income consumers continue to improve modestly and the eventual conversion of Family Dollar to Dollar Tree stores should provide an incremental sales lift for Dollar General." Hence, Dollar General seems to be making the right moves in order to improve its financial performance.


Dollar General's financial ratios are also quite impressive with a forward P/E of 15.96 as compared to its trailing P/E of 19.34, indicating an improvement in earnings in the future. Moreover, analysts anticipate its earnings to grow at an annual rate of 13.41% in the next five years, which is decent. Also, it has a price to sales multiple of 1.08, which is at par with the industry average and reflects that the stock is fairly valued at current levels. All in all, I think that Dollar General could continue getting better as the company's financial performance continues improving due to its smart strategies.

Published on Sep 4, 2015
By Ayush Singh

Copyrighted 2016. Content published with author's permission.

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