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Are Shares of Dollar General a Buy This Holiday Season?

Dollar General’s (DG) affordably priced products have attracted huge crowds over the past couple of months. As the US slowly comes out of recession, will DG’s earnings and growth momentum be at par with its industry peers? Read more to find out.

Dollar General Corporation (DG) is one of the biggest retail chains in the United States, in terms of store count. The company’s widespread appeal lies in its aggressive pricing policy, as it offers a 20% to 40% discount on its products compared to average grocery or drug stores. Most DG stores are located in the rural and suburban areas of the United States. The company’s geographic locations are a major factor boosting its growth.

With a slow economic recovery and significant unemployment, DG is expected to witness significant demand ahead of the holiday season, as people look for affordable gifts. A second wave of coronavirus should also boost DG’s sales significantly, as people are known to panic purchase and hoard goods during such times. The stock has gained 39.8% year-to-date, but it still has plenty of upside left. This combined with several other factors, has helped DG earn a “Strong Buy” rating in our proprietary ratings system.

Here’s how our proprietary POWR Ratings system evaluates DG:

Trade Grade: A

DG is currently trading above its 50-day and 200-day moving averages of $214.75 and $199.72, respectively, indicating a golden cross uptrend. The stock gained 16.5% over the past six months, indicating solid short-term bullishness.

DG has a well-established service chain across the United States, with 17,000 retail stores. In fact, the company inaugurated its 17,000th store in Colorado on November 14th.

DG’s net sales increased 24.4% year-over-year to $8.68 billion in the fiscal second quarter that ended July 2020. This can be attributed to the 18.8% year-over-year rise in same store sales over this period. Operating profit increased 80.5% from the same period last year to $1 billion, while EPS grew 89.1% from the prior-year quarter to $3.12.

Ahead of the holiday season and Black Friday, DG announced several appreciation discounts from November 13th to November 15th. This is expected to drive the company’s sales contingent to the rising consumer demand during this time.

DG began the construction of a new fulfilment center in Nebraska with an initial investment of $85 million. Earlier, in October, DG launched a new retail concept, Popshelf, to boost seasonal shopping at affordable prices. With most items costing below $5, this retail shopping experience could boost DG’s revenues significantly over the long term.

Buy & Hold Grade: A

In terms of proximity to 52-week high, which is a key factor that our Buy & Hold Grade takes into account, DG is pretty well-positioned. The stock is currently trading just 3.2% below its 52-week high of $225.25, which it hit on November 9th.

DG’s revenue and EPS increased at CAGRs of 11.2% and 27.7%, respectively, over the past three years. The company’s net income grew at a CAGR of 24.1% over the past three years, while leveraged free cash flow increased at a CAGR of 38% over the same period.

DG is one of the largest retail chains in the United States by count, with approximately 17,000 stores to date. The company’s vast business channel and affordably priced products have widely appealed to customers from every nook and corner of the country, contributing to its impressive revenue and earnings growth over the years.

Peer Grade: C

DG is currently ranked #4 out of 18 stocks in the Grocery/ Big Box Retailers industry. Other popular stocks in this group include Walmart, Inc. (WMT), Target Corporation (TGT) and Costco Wholesale Corporation (COST).

While TGT beat DG by gaining 40.2% year-to-date, WMT and COST returned 27.6% and 32.1%, respectively, over this period.

Industry Rank: A

Grocery/ Big Box Retailers group is ranked #1 out of 123 industries in the universe. With rising coronavirus cases across the country, a second wave of panic purchases are witnessed across the biggest retail chains, as people are hoarding stocks ahead of a second lockdown. Also, the holiday season is a contributing factor to increased retail demand, as the economic recovery is currently being driven by the retail industry. In fact, the National Retail Federation expects retail sales to increase between 3.6% and 5.2% year-over-year in November and December.

Overall POWR Rating: A (Strong Buy)

DG is rated a “Strong Buy” due to its impressive past performance, short-and-long term bullishness and solid growth momentum, as determined by the four components of thePOWR Ratings.

Bottom Line

A recovering economy and rising unemployment ahead of a holiday season should boost DG’s sales significantly over the upcoming year. The company’s strong fundamentals, expansion strategies and loyal customer base has allowed it to emerge as a leading retail chain in the country, with significant growth potential in upcoming months.

DG has an average broker rating of 1.32, indicating favorable analyst sentiment. Out of 28 Wall Street Analysts that rated the stock, 19 rated it “Strong Buy.” The consensus EPS estimate of $1.97 for the fiscal third quarter that ended October 2020 indicates a 38.7% improvement year-over-year. DG has an impressive earnings surprise history as well, as it beat the street EPS estimates in each of the trailing four quarters. Analysts expect the company’s revenues to grow 16.2% from the year-ago value to $8.12 billion in the about-to-be reported quarter.

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DG shares were trading at $218.58 per share on Monday afternoon, up $0.57 (+0.26%). Year-to-date, DG has gained 41.24%, versus a 14.10% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities.


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