Can Dollar General Keep Leading the Charge?

With shares of Dollar General up 31% year to date, investors are wondering whether the stock still has room to grow.
By Chris Laudani ,

With shares of Dollar General (DG) - Get Reportup 31% year to date, can the stock keep leading the charge?

Three months ago, the company held its annual analyst meeting and outlined its vision through the year 2020. Even with more than 12,500 stores, Dollar General sees more opportunities ahead. Management believes it has just 2.8% market share in an addressable market worth nearly $800 billion. The company believes it can comfortably fit in another 13,000 stores in the U.S.

If Dollar General can achieve that goal, there is no reason not to believe the company's estimate of 7% to 10% net sales growth. Dollar General foresees 6% to 8% square footage growth and a consistent 2% to 4% jump in same-store sales. That kind of expansion will lead to operating profits up between 7% and 11% annually through 2020.

Last month, Dollar General reported solid first-quarter results, with earnings of $1.03 per share vs. the consensus estimate of 93 cents. The better-than-expected results were driven by higher gross margins, a lower tax rate and lower expenses. Same-store sales increased 2.2%.

Sales of consumables jumped 7.6% and home products were up 6.5%. Even a tough category like seasonal items was up 6.4%.

For the second quarter, analysts are looking for same-store sales to increase 2.5% and earnings of $1.09 per share. Revenue is expected to rise 10% to $5.5 billion.

For the year, analysts think Dollar General  can report sales of $22.4 billion, up 10%, and earn $4.65.

Dollar General has an attractive business model. Since the stores are small (just 7,500 square feet), they cost only $250,000 to build out. The stores begin to pay back in just 1.7 years and are cash-flow positive in a year. The company knows very quickly if a location doesn't work.

I think shares of Dollar General are attractive on a dip under $85. The company has a strong track record of consistent growth. In fact, Dollar General ended last year with its 32nd consecutive quarter of quarter-over-quarter comparable-sales growth. Since 2009, net sales have grown at a compounded growth rate of 9.5%, while earnings are up over 11% annually.

There's a lot to like about Dollar General -- except the valuation. 

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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