5. Dollar General Corporation (NYSE:DG)
Forward P/E: 14.41
Analysts’ Upside Potential: 12.15%
Number of Hedge Fund Holders: 42
Dollar General (NYSE:DG) operates a chain of over 20,000 discount retail stores across the US and Mexico. Its stores offer discounted deals and reduced prices on various offerings, including clothing, grocery items, kitchenware, pharmaceuticals, outdoor furniture, health supplies, and more. Its discounted rates and a large number of stores give it a competitive advantage, especially since it is focusing on a fast rural expansion of its chain. Dollar General (NYSE:DG) is planning to open more than 800 stores across the US and remodel approximately 1,500 locations while relocating 85 stores in 2024.
The company is also prioritizing a timely and accurate supply chain, customer-centric merchandising, and in-store execution to boost its profitability. It is centering efforts around strengthening its connection with its customer base by ensuring that they have a positive experience. To do so, Dollar General has increased employee presence at the front of their stores for increased engagement that facilitates a positive checkout experience. It is focusing labor hours on perpetual inventory management to boost its in-stock levels and facilitate sales growth.
The company’s merchandising and supply chain teams are also putting in efforts to expedite in-store progress, helping simplify operations for its teams. All these efforts are showing significant year-over-year improvements in the company’s in-stock levels, strengthening its position in the industry.
In addition, Dollar General Corp (NYSE:DG) is one of the companies in a good position to benefit from the US Federal Reserve’s September interest rate cuts. The cuts are anticipated to increase liquidity in the market, which can drive sales by benefiting customers.
Artisan Value Fund stated the following regarding Dollar General Corporation (NYSE:DG) in its fourth quarter 2023 investor letter:
“Our biggest full-year detractors included energy holdings Schlumberger and EOG and 2023 purchases Baxter International and Dollar General Corporation (NYSE:DG). Dollar General, a discount retail chain in the US, has dealt with a few struggles. The retailer had previously benefited from COVID stimulus checks, reflected in the bump it experienced in revenues and margins.
However, the effects have worn off, and its core consumer has been hurt by inflation, stiffer economic conditions, lower tax refunds and reduced SNAP benefits. Margins are also under pressure due to labor costs, shrink and markdowns. Some of the issues are likely self-inflicted. After years of focusing on store growth to drive the top line, store standards have suffered. Addressing store standards is needed to turn around flagging traffic, comps and customer satisfaction. On the positive side, discount retail due to its trade-down feature tends to be a defensive business during economic slowdowns.
Dollar General has a strong market position and faces less competition than other discounters due to its largely rural footprint. The business’s value proposition is everyday low prices, a convenient format, and proximity. The company has leverage due to capital expenditures, but interest coverage of ~9X is strong. From a valuation perspective, the froth from the pandemic, when it traded in the low- to mid-twenties, is gone. So, we aren’t paying for margin upside or store growth. Those would be bonuses. If the company can continue to grow revenues, generate cash flow, and buy back stock, we still see a path to success.”
