Dollar General Corp. (DG), Wal-Mart Stores, Inc. (WMT): Three Risk Factors That Investors Should Evaluate

Besides the inherent restrictions imposed by debt obligations, Dollar General’s loan agreements comprehend other specific limitations (i.e. inability to acquire new debt, sell assets, issue disqualified stock, etc) that widely reduce the company’s decision margin.

In addition to the previously mentioned issues, the corporation must face variable interest rates. This means that the actual debt figure is somewhat unpredictable and largely subject to fluctuations in the US and World economy.

3) Limits on operating margin upside

Dollar General Corp (NYSE:DG). has shown to be very successful in the expansion of operating margins, increasing its figures from the 7% span to a current 10%. This has meant that around a 40% of the company’s profits over the last five years has accounted for these margins. Unfortunately (for the investors, at least), this tendency seems to be reaching its limit. Credit Suisse (See Credit Suisse, “Dollar Stores, Assuming Coverage. Multi-year Run…” pp. 44 and 45
points out four main reasons to believe this:

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Growth shifting to lower margin urban markets

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Management’s focus on unit growth (delaying price increases) in a re-inflationary environment

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Increased mix pressure from the additional expansion into low margin categories like Tobacco

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Increased competitive pressure from Wal-Mart

Foolish conclusion

In conclusion, Dollar General’s financial performance largely depends on the company’s ability to manage and respond effectively to the above mentioned challenges presented by the main competitors and the general increase in market competition, as well as its capability to cope with new government (mainly fiscal) or creditor imposed situations.