Dollar General stock analysis. DG stock.
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Dollar General reported earnings recently and the stock dropped over 20%. Shares are now down 38% year to date. On its face, first quarter earnings weren’t too bad. Net sales increased 6.8% to 9.3 billion dollars and same stores sales were up 1.6%.

Looking at the recent trends, revenues, profits and margins all seem to be relatively stable. What hurt the stock most was a negative outlook. Management admitted that the economic environment is more challenging than they had anticipated.

Instead of a 4-6% increase in earnings this year, they now expect a decrease of as much as 8%. As a result, the company is reducing the number of store openings and halting share buybacks.

A key reason for this negative outlook is inflation. Although overall sales are still moving higher, most of the revenue is coming from low margin products like food and not higher margin products like electronics.

Dollar General has made a push into these higher margin products at precisely the wrong time. Higher inflation is keeping shoppers away, meanwhile Dollar General’s operating costs and inventories have all increased.

Looking at the latest numbers, Dollar General now has a market cap of 34.2 billion. But with 7 billion of long-term debt the enterprise value is over 40 billion. And that debt translates to over 250 million of interest expenses.

Revenue over the last 12 months was 38.4 billion with net income of 2.4 billion and adjusted ebitda was 4.1 billion. So the stock is currently valued at 1.1 times revenue, 10 times ebitda and 14 times earnings.

Discount stores, with their ultra-low prices are often referred to as recession-proof, so this move in Dollar General will have caught many investors off guard. And, historically, Dollar General has been a solid performer. The current PE multiple sits right at the bottom of its historical average.

Let’s assume the stock maintains its historical revenue growth of 8% for the next 10 years and operates with its historical net margin of 6%. That would put net income at roughly 5 billion in 10 years time and a 20 times multiple takes the valuation up to 100 billion dollars. Assuming a slowly increasing dividend and the investment return is close to 10% per year.

The problem is, Dollar General doesn’t seem to be on the right path. It should be thriving in this environment. Instead its cutting back stores and halting share buybacks which are a key catalyst for share price gains. For those reasons, it’s best to avoid this stock and wait for a better entry. But these are my own opinions, not financial advice and I have no position in Dollar General stock.

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