Dollar General (NYSE:DG) is a specialty retailer that sells discount consumer goods for a price generally between $1 and $10 per item. Its focus is on "everyday necessities" such as national brands in the consumable, seasonal, home products, and apparel product categories. Another important company distinction is that 70% of its store base exists in rural towns with a population of 20,000 or less. Even more importantly, the stock recently caught the attention of Warren Buffett's Berkshire Hathaway. (For other Buffett investments, read Warren Buffett's Best Buys.)
Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.


Second Quarter Recap
Total sales advanced 11.2% to $3.6 billion on the back of impressive comparable store sales growth of 5.9% and new store openings. For the first two quarters of its fiscal year, it opened a net new 269 stores for a total store count of 9,641. By product category, consumables grew 13.7% to account for 73% of total sales. Seasonal (14% of total sales) and home products (7%) grew at 6.7% and 6%, respectively, while apparel (6%) improved a modest 1.2%.

Cost controls on the operating side helped push operating income up 16% to about $350 million. However, a big jump in other expense lowered net income growth to only 3%. Earnings came in at $146 million while diluted earnings grew only 2% to 42 cents per share as shares outstanding increased slightly.

Full-Year Outlook
Dollar General projects sales growth of 12% to 14% for the entire fiscal year. Analysts currently expect sales growth of 12.3% and total sales of $14.6 billion. Management guided earnings between $2.20 and $2.34 per diluted share that would represent year-over-year growth of 22 to 26%.

The Bottom Line
In its most recent annual filing with the Securities and Exchange Commission, Dollar General stated that it believes it can double its store count from current levels. These aggressive expansion goals will be needed because, at a forward P/E of around 16, the market is already discounting at least another decade of double-digit profit growth.

Dollar General competes in an extremely competitive market for general merchandise. It considers Family Dollar (NYSE:FDO), Rite Aid (NYSE:RAD) and CVS (NYSE:CVS) direct rivals given their smaller-store formats, but also counts Wal-Mart (NYSE:WMT) as a key competitor. However, its rural focus is a key competitive advantage and keeps it out of the path of larger rivals that can better compete on price due to their buying power.

This advantage and a high degree of recession-resistance are likely two qualities that stood out to Berkshire. The buy is being attributed to Todd Combs, Buffett's younger protégé, but the fact that it showed up in Berkshire's portfolio during the second quarter suggest it also received Buffett's seal of approval.

The share price has jumped roughly 20% since Berkshire's position became known. This means the risk-reward tradeoff is less favorable for prospective investors, but shareholders should be able to count on annual returns around 10% as this represents the company's likely annual operating growth potential over the long haul. (For more on Buffett's investment strategies, see Warren Buffett's Bear Market Maneuvers.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Term

    What are Non-GAAP Earnings?

    Non-GAAP earnings are a company’s earnings that are not reported according to Generally Accepted Accounting Principles.
  2. Mutual Funds & ETFs

    ETF Analysis: PowerShares FTSE RAFI US 1000

    Find out about the PowerShares FTSE RAFI U.S. 1000 ETF, and explore detailed analysis of the fund that invests in undervalued stocks.
  3. Options & Futures

    Use Options to Hedge Against Iron Ore Downslide

    Using iron ore options is a way to take advantage of a current downslide in iron ore prices, whether for producers or traders.
  4. Stock Analysis

    Fortinet: A Great Play on Cybersecurity

    Discover how a healthy product mix, large-business deal growth and the boom of the cybersecurity industry are all driving Fortinet profits.
  5. Stock Analysis

    2 Catalysts Driving Intrexon to All-Time Highs

    Examine some of the main reasons for Intrexon stock tripling in price between 2014 and 2015, and consider the company's future prospects.
  6. Stock Analysis

    Net Neutrality: Pros and Cons

    The fight over net neutrality has become an amazing spectacle. But at its core, it's yet another skirmish in cable television's war to remain relevant.
  7. Charts & Patterns

    Understand How Square Works before the IPO

    Square is reported to have filed for an IPO. For interested investors wondering how the company makes money, Investopedia takes a look at its business.
  8. Technical Indicators

    4 Ways to Find a Penny Stock Worth Millions

    Thinking of trading in risky penny stocks? Use this checklist to find bargains, not scams.
  9. Professionals

    Chinese Slowdown Affects Iron Ore Market

    The Chinese economy's ongoing slowdown is having a major impact on iron ore demand.
  10. Investing Basics

    Why do Debt to Equity Ratios Vary From Industry to Industry?

    Obtain a better understanding of the debt/equity ratio, and learn why this fundamental financial metric varies significantly between industries.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Profit Margin

    A category of ratios measuring profitability calculated as net ...
  3. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis ...
  4. Debt Ratio

    A financial ratio that measures the extent of a company’s or ...
  5. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing ...
  6. Net Present Value - NPV

    The difference between the present values of cash inflows and ...
RELATED FAQS
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the formula for calculating compound annual growth rate (CAGR) in Excel?

    The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... Read Full Answer >>
  3. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  4. When does the fixed charge coverage ratio suggest that a company should stop borrowing ...

    Since the fixed charge coverage ratio indicates the number of times a company is capable of making its fixed charge payments ... Read Full Answer >>
  5. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  6. What is the difference between the return on total assets and an interest rate?

    Return on total assets (ROTA) represents one of the profitability metrics. It is calculated by taking a company's earnings ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!