Dollar General (NYSE:DG) has benefited from the COVID-19 pandemic, particularly in 2020 as it remained an essential business that stayed open while other businesses shut down.
This led to a 21.6% revenue increase from January 2020 to January 2021. Now that the pandemic is mostly behind us, DG is expected to have slightly negative earnings growth, and low single-digit revenue growth for 2022, before returning to high single-digit growth.
We are neutral on Dollar General. (See Dollar General stock charts on TipRanks)
Growth Catalysts
Dollar General operates in the retail industry, which is expected to grow at a CAGR of 4.5% from 2021 to 2026.
E-commerce is the fastest growing segment of retail, and Dollar General is not known for its e-commerce presence. Despite not being heavy on e-commerce, Dollar General has still been able to consistently grow over the years through its strategy of opening new stores in rural areas where there isn’t much competition. For 2021, Dollar General is on track to open 1,035 retail locations, while closing just 18.
The company is also venturing into healthcare by offering more health products on its shelves, and is planning on offering health services.
DG’s CEO Todd Vasos said that the reason for the move into healthcare is because about 65% of the company’s stores are located in “health deserts,” where people must drive long distances to get access to basic medical care.
This strategy makes sense and should help DG fuel future growth. The company recently hired a Chief Medical Officer, indicating that it is serious about this move.
Measuring Efficiency
Retailers such as Dollar General need to hold billions of dollars’ worth of inventory in order to keep the business running. Therefore, the speed at which a company can move inventory and convert it into cash is very important in predicting success. To measure DG’s efficiency, we will use the cash conversion cycle which shows how many days it takes to convert inventory into cash. It is calculated by as follows:
CCC = Days Inventory Outstanding + Days Sales Outstanding - Days Payables Outstanding
Dollar Generals’ cash conversion cycle is 23 days, meaning it takes the company 23 days for it to convert its inventory to cash. This is better than its closest competitors, Five Below (NASDAQ:FIVE) and Dollar Tree (NASDAQ:DLTR), at 39 and 40 days, respectively.
DG’s gross profit margins are 32.1%. This figure is better than Dollar Tree’s 30.8% margins, but worse than Five Below’s 35.8%. One important thing to note is that before COVID-19 gave a boost to DG, its gross profit and EBIT margins were on a slow, but steady downward trend, indicating that competition could slowly be chipping away at DG.
Wall Street's take
According to TipRanks' analyst rating consensus, Dollar General has a Strong Buy rating, based on unanimous 10 buys assigned in the past three months. The average Dollar General price target of $253.78 implies 15% upside potential.
Final Thoughts
Although Dollar General is a great recession-proof company that should do well over the long term, we are currently neutral due to its low growth, relatively low returns on capital, and slowly declining margins.
Disclosure: At the time of publication, Stock Bros Research did not have a position in any of the securities mentioned in this article.
Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of TipRanks or its affiliates, and should be considered for informational purposes only. TipRanks makes no warranties about the completeness, accuracy or reliability of such information. Nothing in this article should be taken as a recommendation or solicitation to purchase or sell securities. Nothing in the article constitutes legal, professional, investment and/or financial advice and/or takes into account the specific needs and/or requirements of an individual, nor does any information in the article constitute a comprehensive or complete statement of the matters or subject discussed therein. TipRanks and its affiliates disclaim all liability or responsibility with respect to the content of the article, and any action taken upon the information in the article is at your own and sole risk. The link to this article does not constitute an endorsement or recommendation by TipRanks or its affiliates. Past performance is not indicative of future results, prices or performance.