Dollar General Corporation

Transcription

1 March 19, 2015 Dollar General Corporation Current Recommendation SUMMARY DATA NEUTRAL Prior Recommendation Outperform Date of Last Change 11/09/2011 Current Price (03/18/15) $75.39 Target Price $ Week High $ Week Low $53.50 One-Year Return (%) Beta 0.41 Average Daily Volume (sh) 3,568,700 Shares Outstanding (mil) 303 Market Capitalization ($mil) $22,875 Short Interest Ratio (days) 0.98 Institutional Ownership (%) 92 Insider Ownership (%) 1 (DG-NYSE) SUMMARY Dollar General, which failed in its attempt to acquire Family Dollar, posted fourth-quarter fiscal 2014 results, wherein both the top and bottom lines witnessed year-over-year increase of 9.9% and 15.8%, respectively, on the back of growth across Consumables, Seasonal, Home products and Apparel categories. However, where earnings per share met the Zacks Consensus Estimate, net sales came below expectation due to a competitive retail landscape. We believe Dollar General s initiatives as regards to management of expense, inventory, merchandise and operations are likely to push sales north. However, margins are likely to remain under pressure due to an increase in the sales of lower margin carrying consumables items and labor disruption at the West Coast ports. Management hinted that a slowdown at West Coast ports would hurt first-quarter fiscal 2015 earnings per share. Currently, we stay Neutral on the stock. Risk Level * Low, Type of Stock Large-Growth Industry Retail-Discount Zacks Industry Rank * 98 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Apr) (Jul) (Oct) (Jan) (Jan) Annual Cash Dividend $0.00 Dividend Yield (%) Yr. Historical Growth Rates Sales (%) 9.9 Earnings Per Share (%) 20.1 Dividend (%) N/A ,234 A 4,395 A 4,382 A 4,494 A 17,504 A ,522 A 4,724 A 4,724 A 4,939 A 18,910 A ,935 E 5,126 E 5,106 E 5,336 E 20,503 E ,284 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year using TTM EPS 21.5 (Apr) (Jul) (Oct) (Jan) (Jan) 2013 $0.71 A $0.77 A $0.72 A $1.01 A $3.20 A using 2015 Estimate $0.72 A $0.83 A $0.79 A $1.17 A $3.50 A using 2016 Estimate $0.82 E $0.94 E $0.88 E $1.29 E $3.93 E 2016 $4.49 E Zacks Rank *: Short Term Quarterly figures may not add up to annual due to rounding off 1 3 months outlook 3 - Hold Projected EPS Growth - Next 5 Years % 12 * Definition / Disclosure on last page 2015 Zacks Investment Research, All Rights reserved S. Riverside Plaza, Chicago IL 60606

2 OVERVIEW Founded in 1939 and headquartered in Goodlettsville, Tennessee, Dollar General Corporation is one of the largest discount retailers in the United States. The company trades in low priced merchandise typically $10 or less. Apart from offering quality private brands, the company also provides products from other reputed manufacturers such as Procter & Gamble, Kimberly-Clark, Unilever, Kellogg's, General Mills, Nabisco, Hanes, PepsiCo and Coca-Cola. As of January 30, 2015, Dollar General had 11,789 stores in 40 states. It offers general merchandise in four categories namely Consumables, Seasonal, Home products and Apparel. The Consumables Category is the leading category (76% of net sales for fiscal 2014) consisting of cleaning products, health & beauty products, snacks, perishables, packaged food and pet supplies and food. The Seasonal Products Category (12% of net sales for fiscal 2014) consists of prepaid phones and accessories, small electronics, batteries, toys, greeting cards, hardware, decorations, automotive gardening supplies, stationery and home office supplies. The Home products Category (6% of net sales for fiscal 2014) includes kitchen supplies, candles small appliances, light bulbs, cookware, frames, craft supplies, bed & bath soft goods and storage containers. The Apparel Category (5% of net sales for fiscal 2014) consists of casual daily wear for infants, children, girls, boys, women and men, along with socks, intimate wear, disposable diapers, accessories and shoes. REASONS TO BUY The Growth Catalysts: We believe that the company s commitment towards better price management, cost containment, private label offering, effective inventory management, merchandise and operational initiatives should drive sales and margin trends. Moreover, in order to increase traffic, Dollar General is focusing on both consumables and discretionary categories, and items ranging between $1 and $5. The roll out of tobacco has been a key factor in driving up traffic. In addition, the company is expanding its cooler facilities to enhance the sale of perishable items, and is also rolling out DG digital coupon program. Sales of the consumables category continue to improve during the fourth quarter of fiscal 2014, primarily buoyed by the sturdy sales of tobacco products, perishables, candy and snacks and health care. Impressive Comparable-Store Sales Performance: Dollar General has displayed a fabulous comparable-store sales growth story. The company s comparable-store sales remained robust despite unfavorable macroeconomic conditions mainly due to competitive pricing and strategic store expansion plans, including remodeling and relocations. Fiscal 2014 represented the 25 th consecutive year of comparable-store sales growth. In fiscal 2014, the company has posted 1.5%, 2.1%, 2.8% and 4.9% comps growth for the first, second, third and fourth quarters, respectively. Active Management of Cash Flows: Dollar General has been actively managing its cash flows, returning much of its free cash to shareholders through share repurchases. The company bought back 14.1 million shares for $800 million during fiscal Since the commencement of the share repurchase program in December 2011, the company has bought back 44.5 million shares aggregating $2.3 billion. The company s Board of Directors recently announced an additional Equity Research DG Page 2

3 buyback program of $1 billion, thereby increasing the total authorization above of $1.2 billion. Dollar General also initiated quarterly dividend of $0.22 per share. In fiscal 2015, the company plans to return approximately $1.6 billion to shareholders via share buybacks and dividends. The company has been also making prudent investments relating to store infrastructure; store openings, expansions and relocations; and improvement of distribution centers to drive revenue. Store Expansion: Dollar General is also accelerating its pace of new store openings. The company opened 700 new outlets and remodeled or relocated 915 stores during fiscal During fiscal 2015, the company expects to open about 730 new stores, and to relocate or remodel about 875 stores. Further, the company plans to increase new store openings at a rate of 7% square footage growth in fiscal 2016, resulting in approximately 900 new store openings. The company is now focusing on smaller format stores as it require less capital expenditure and helps to tap area where space remains a constraint. REASONS TO SELL Gross Margin to Remain under Pressure: We remain concerned about the increasing gross margin pressure due to rise in sales of low margin carrying products and West Coast port disruption. Consumables category now accounts for 74% of the fourth quarter fiscal 2014 sales compared with 73% in the prior-year quarter. Consequently, the increase in sales of lower margin merchandises weighed upon the company s gross margin that contracted approximately 23 basis points to 31.7% during the quarter under review. Macroeconomic Factors May Impact Discretionary Sales: The company s customers remain sensitive to macroeconomic factors including interest rate hikes, increase in fuel and energy costs, credit availability, unemployment levels, and high household debt levels, which may negatively impact their discretionary spending, and in turn the company s growth and profitability. We remain cautious about the economy and therefore don t expect trends to change significantly. Competitive Pressure: Dollar General operates in the highly competitive discount retail merchandise sector. The company faces stiff competition from Family Dollar, Wal-Mart, Target, Dollar Tree, Fred's, 99 Cents Only and various other local, independent operators. Some of these competitors boast superior financial, distribution, and marketing resources. Cannibalization a Threat: Dollar General s expansion in the geographies, where it already serves could boomerang. This may cannibalize sales performance and lower traffic counts at individual stores. Consequently, this may have a negative impact on the company s overall performance. RECENT NEWS Dollar General Q4 Earnings Meet, Revenues Miss Estimates March 12, 2015 Dollar General Corporation reported fourth-quarter fiscal 2014 results, wherein earnings of $1.17 per share met the Zacks Consensus Estimate, and rose 15.8% from the year-ago period. Net sales of this discount retailer increased 9.9% to $4,939.1 million but came below the Zacks Consensus Estimate of $4,957 million. Equity Research DG Page 3

4 Sales in the Consumables category jumped 10.7% to $3,654.4 million; the Seasonal category witnessed a 5.7% rise in sales to $685.3 million, while Home products sales increased 9.7% to $337.5 million. Sales in the Apparel category grew 11.2% to $261.8 million. Consistently increasing traffic and average transaction value led to 4.9% growth in comparable-store sales. Strength was witnessed across all categories, primarily in tobacco products, perishables, candy and snacks and health care. Gross profit increased 9.1% to $1,565.4 million, while gross margin contracted 23 basis points to 31.7% due to higher sales of low margin products like consumables and West Coast port disruption. Operating profit grew a 5.3% to $566.7 million; however, operating margin shriveled 50 basis points to 11.5%. Other Financial Details Dollar General ended the quarter with cash and cash equivalents of $579.8 million, long-term obligations of $2,639.4 million and shareholders equity of $5,710 million. The company incurred $374 million in capital expenditures during fiscal Management now projects capital expenditures to be in the band of $500 million to $550 million in fiscal The company bought back 14.1 million shares for $800 million during fiscal Since the commencement of the share repurchase program in December 2011, the company has bought back 44.5 million shares aggregating $2.3 billion. The company s Board of Directors recently announced an additional buyback program of $1 billion, thereby increasing the total authorization above of $1.2 billion. Dollar General also initiated quarterly dividend of $0.22 per share that will be paid on April 22, 2015 to shareholders of record as of April 8, In fiscal 2015, the company plans to return approximately $1.6 billion to shareholders via share buybacks and dividends. Stores Update Dollar General opened 700 new outlets, while closing 43 stores during fiscal 2014, thereby bringing the total store count to 11,789. The company remodeled or relocated 915 outlets during fiscal. The company s plan is to open about 730 new stores and relocate or remodel around 875 stores during fiscal Further, the company plans to increase new store openings at a rate of 7% square footage growth in fiscal 2016, resulting in approximately 900 new store openings. Guidance Dollar General now projects fiscal 2015 earnings between $3.85 and $3.95 per share, reflecting yearover-year growth of 10% to 13%. Management hinted that labor disruption at the West Coast ports will have a negative impact on the first-quarter fiscal 2015 earnings per share. For fiscal 2015, total sales are expected to grow 8% to 9% year-over-year, while comparable-store sales are expected to increase in the range of 3% to 3.5%. Management envisions operating profit growth of 7% to 9% over fiscal 2014 adjusted operating profit. Equity Research DG Page 4

5 VALUATION Dollar General s current trailing 12-month earnings multiple is 21.5X, compared with 30.5X, the industry average and 18.1X for S&P 500. Over the last five years, Dollar General s shares have traded in a range of 14.9X to 21.8X trailing 12-month earnings. The stock is also trading at a discount to the peer group, based on forward earnings estimates. Our target price of $79.00, 20.1X 2015 EPS, reflects this view. Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low Dollar General Corporation (DG) Industry Average S&P The TJX Companies, Inc. (TJX) Ross Stores Inc. (ROST) Family Dollar Stores Inc. (FDO) TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA Dollar General Corporation (DG) Industry Average S&P Equity Research DG Page 5

6 Earnings Surprise and Estimate Revision History Equity Research DG Page 6

7 DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of DG. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1130 companies covered: Outperform %, Neutral %, Underperform 8.9%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Equity Research DG Page 7