Bargain Buy at Dollar General

On Tuesday, discount retailer Dollar General (DG - commentary - Cramer's Take) reported a loss of $5.3 million after booking $79 million in restructuring charges. Its shares -- which could easily have been killed on the results -- have held up for a simple reason: The charges show the company is serious about eliminating lousy inventory management and slowing red-hot store expansion -- two things that need to be done -- and is willing to take a hit to prove it.

In my book, those are big positives and spell solid opportunity for share growth down the road. But there are other reasons to be optimistic as well.

First, Tuesday's fiscal third-quarter report wasn't all bad. Despite the bottom-line number, Dollar General's top-line sales jumped 7.6% to $2.2 billion, and same-store sales rose 2% vs. the year-ago period. Although I like to see same-store sales rise upward of 5%, the solid top-line growth means that the retailer's problems rest with cost management and not marketing.

Plus, for the most recent full fiscal year ended February 2006, the company made $350 million on sales of $8.6 billion and boasted $1.7 billion in shareholders' equity. Those aren't bad long-term fundamentals.

Changes Ahead

Meanwhile, Dollar General's restructuring plan, announced in late November, calls for a load of initiatives, the most important of which is eliminating the "packaway" inventory-management model. This model -- which has managers saving unsold inventory instead of marking it down and getting rid of it -- flies in the face of good inventory management, which means keeping fresh, relevant inventory on shelves for people to buy. As that system changes, sales should improve while costs stay under control.

Backing up the new inventory model is "EZstore." This inventory and cost-control initiative is designed to improve inventory flow from distribution centers to customers, to improve supply-chain and warehousing systems, to automatically restock inventory at the store level and to provide company merchants with better information. While the jury is out on how well this will work, the move is promising.

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At the time of publication, Burritt had no positions in any of the stocks mentioned in this column, although positions may change at any time. Wayne Burritt is president and director of equity research for Burritt Research, which operates BurrittResearch.com. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Burritt appreciates your feedback; click here to send him an email.