Making Sense Out of Dollar General’s Earnings Beat

I have to admit that I have never been impressed by Dollar General (NYSE: DG), but its first-quarter earnings beat has made me stop and take notice. Let’s run the numbers and I’ll tell you why I think this may be an interesting play going forward.Dollar-General-earnings

Dollar General’s earnings came in at $0.84 per share, which was 16.7% ahead of last year and also beat estimates by 2 cents. We have to account first for the 7.1 million shares of stock the company repurchased, so that we aren’t fooled by financial engineering with respect to organic net income growth.

Net income jumped from $222.4 million to $253.2 million, which is a 13.8% increase. That’s still quite impressive, especially since sales increased 8.8% to $4.91 billion.

I was pleasantly surprised to find strength across the board in the company’s different categories. Home products increased 6.9% to $302 million, and apparel sales increased 9.49% to $276 million. The company’s seasonal products saw an 8.3% increase to $585 million. Its largest segment, consumables, leapt almost 9% to $3.75 billion.

All of these revenues reflect a 3.7% increase in same-store sales. That’s not a spectacular number, but it is respectable.

Of all of these categories, the most intriguing was apparel. I have never considered a dollar store to be a place where one would buy apparel, but this is a good lesson in confounding expectations.

I think expanding its presence in apparel could challenge other lower-end stores like Wal-Mart (NYSE: WMT) and Target (NYSE: TGT), and that could goose Dollar General’s sales significantly going forward.

And I doubt anyone expected any of the dollar chains to get into refrigerated food or produce, yet Dollar General and some of the others have, and I think that stole some market share from grocery stores.

On Dollar General’s balance sheet we find $226 million of cash, offset by $2.62 billion of debt. However, that debt is very cheap, averaging about 3.41% in interest each year.

In the past, I admit to scoffing at Dollar General. Anytime I compared dollar stores to each other, they were all handily crushed on a purely quantitative level by Dollar Tree (NASDAQ: DLTR).

Although that is still the case, I was not fond of Dollar Tree’s purchase of Family Dollar (NYSE: FDO), because the price tag was way too high. Dollar Tree is going to have to engineer one heck of a turnaround at that chain, or infuse it with its own corporate culture and efficiencies.

That may give Dollar General a chance to catch up, although it must improve its own efficiency to a significant degree. Although it has a market cap 40% greater than Dollar Tree, it carries six times as many employees yet only generates about twice the revenue. Consequently, its gross margin was about 10% less than Dollar Tree’s.

So when I see Dollar General trading at 19 times fiscal year 2015 estimates on 13.8% net income growth, I see a stock that is overpriced but for which there is hope. And we are seeing some progress. Gross margins increased by 45 basis points and net margins improved by 22 basis points to 5.05%.

For now, I think Dollar General is too expensive. However, in time, it may prove to be the dollar store to buy.

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Published by Wyatt Investment Research at