Dollar General Heating Up

By Ryan C. Fuhrmann | March 18, 2012 AAA

Discount retailer Dollar General (NYSE:DG) reported positive sales trends at its existing stores during 2011, marking the 22nd straight year it has been able to achieve such a feat. This consistency over more than two decades recently caught the attention of a famed billionaire investor, who likely plans to stick with the name for the long haul.
Full Year Recap
Dollar General's sales grew 13.6% to $14.8 billion. Comparable store sales improved a very healthy 6% and was attributed to both higher customer traffic and a higher average transaction amount. Additionally, the company opened 565 net new stores to bring the year end store count to 9,937, and grew its selling square footage by 7% to nearly 72 million square feet.

The sale of food, shampoo, pet supplies and other consumables continued to be the largest sales contributor at more than 73% of the total top line. It was also the fastest growing at 1.1%. The home products category was the next fastest grower and was followed by seasonal merchandise, then apparel sales, all of which grew in the single digits. Dollar General prides itself on selling "high quality national brands from leading manufacturers" that include Procter & Gamble (NYSE:PG), Kimberly-Clark (NYSE:KMB), Kellogg (NYSE:K) and Kraft Foods (NYSE:KFT).

Operating profits jumped 17% to $1.5 billion as Dollar General was able to control its SG&A operating costs and pass along higher commodity costs to its customers. Lower interest expense and higher other income helped send net income ahead by 22.1% to $766.7 million, or $2.22 per diluted share. Free cash flow improved to $535.6 million, or approximately $1.55 per diluted share. To know more about income statements, read Understanding The Income Statement.

Outlook and Valuation
For 2013, Dollar General believes that sales will rise around 10% and earnings between $2.65 and $2.75 per diluted share. This would represent solid annual profit growth in a range of 19.4 and 23.9%.

At a current share price just about $46 per share, Dollar General's forward P/E is slightly above 14.

The Bottom Line
Growth trends are really perking up at Dollar General and has been so impressive that they caught the attention of Warren Buffett's Berkshire Hathaway (NYSE:BRK.A, BRK.B). One of his younger protégés likely picked up the shares late last year, but was added to the firm's investment portfolio nonetheless. This increased attention and solid operating fundamentals have pushed the stock price and valuation to lofty levels, but will end up still being reasonable entry points should Dollar General continue growing around 20% per year. For additional reading, check out 5 Must-Have Metrics For Value Investors.

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At the time of writing Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article.

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