Dollar General Corp.’s analysis versus peers uses the following peer-set: Wal-Mart Stores, Inc. (NYSE:WMT)*, Costco Wholesale Corporation (NASDAQ:COST), Target Corporation (NYSE:TGT), Dollar Tree, Inc. (NASDAQ:DLTR), Family Dollar Stores, Inc. (NYSE:FDO)* and Big Lots, Inc. (NYSE:BIG)*. The table below shows the preliminary results along with the recent trend for revenues, net income and returns.
*CapitalCube recently analyzed earnings for other companies in the Discount Stores sector; here are links: Earnings Analysis: Big Lots Inc. (NYSE:BIG), Earnings Analysis: Wal-Mart Stores Inc. (NYSE:WMT), Earnings Analysis: Family Dollar Stores Inc. (NYSE:FDO).
| Quarterly (USD million) | 2012-10-31 | 2012-07-31 | 2012-04-30 | 2012-01-31 | 2011-10-31 |
|---|---|---|---|---|---|
| Revenues | 3,964.6 | 3,948.7 | 3,901.2 | 4,185.1 | 3,595.2 |
| Revenue Growth % | 0.4 | 1.2 | (6.8) | 16.4 | 0.6 |
| Net Income | 207.7 | 214.1 | 213.4 | 292.5 | 171.2 |
| Net Income Growth % | (3.0) | 0.3 | (27.0) | 70.9 | 17.2 |
| Net Margin % | 5.2 | 5.4 | 5.5 | 7.0 | 4.8 |
| ROE % (Annualized) | 17.4 | 18.2 | 18.4 | 25.4 | 15.3 |
| ROA % (Annualized) | 8.2 | 8.6 | 8.7 | 12.0 | 7.1 |
Valuation Drivers
Dollar General Corp.’s current Price/Book of 3.0 is about median in its peer group. The market expects DG-US to grow at about the same rate as its chosen peers (PE of 15.7 compared to peer median of 15.4) and to maintain the peer median return (ROE of 20.0%) it currently generates.
The company’s relatively high profit margins (currently 5.8% vs. peer median of 4.2%) are burdened by asset inefficiency with asset turns of 1.6x compared to the peer median of 2.6x. Overall, this suggests a margin driven operating model relative to its peers. DG-US’s net margin is its highest relative to the last five years and compares to a low of -0.1% in 2008.
Economic Moat
The company enjoys both better than peer median annual revenue growth of 13.6% and better than peer median earnings growth performance 22.1%. DG-US currently converts every 1% of change in annual revenue into 1.6% of change in annual reported earnings. We view this company as a leader among its peers.
DG-US’s current return on assets is around the same as its peer median (9.3% vs. peer median 8.5%). This recent performance contrasts with its less than peer median return on assets over the past five years (3.9% vs. peer median 8.4%) suggesting that the company’s relative operating performance is improving.
The company’s gross margin of 33.5% is around peer median suggesting that DG-US’s operations do not benefit from any differentiating pricing advantage. However, DG-US’s pre-tax margin is more than the peer median (9.2% compared to 6.3%) suggesting relatively tight control on operating costs.
Growth & Investment Strategy
While DG-US’s revenues have grown faster than the peer median (12.3% vs. 8.0% respectively for the past three years), the market gives the stock an about peer median PE ratio of 15.7. This suggests that the market has some questions about the company’s long-term strategy.
DG-US’s annualized rate of change in capital of 1.4% over the past three years is less than its peer median of 2.0%. This below median investment level has also generated a less than peer median return on capital of 8.1% averaged over the same three years. This outcome suggests that the company has invested capital relatively poorly and now may be in maintenance mode.
