Dollar General's Store Buyouts Bode Well, SNAP Cuts Woes Stay

Shares of Dollar General Corporation (NYSE:DG) have been riding high on store acquisitions program, better price management, merchandise initiatives and cost containment. In the past three months, the company’s shares have gained nearly 3%, outperforming the Zacks categorized Retail-Discount & variety industry’s decline of 7%. However, cut in SNAP raises concern. Let’s delve deeper.

Dollar General revealed that the Federal Trade Commission approved its plan to buy 322 stores across 36 states, from a small multi-price point retailer. While the deal is anticipated to conclude in Jun 2017, the new store sites are expected to be converted into Dollar General’s banner by Nov 2017 end. This transaction is likely to impact fiscal 2017 results. Including the impact from the aforementioned buyout, management now projects net sales to rise in the band of 5–7%, compared with the previous forecast of 4–6% increase.

We believe that the company’s commitment toward better price management, cost containment, private label offering, effective inventory management, merchandise and operational initiatives should drive sales and margin trends.

Dollar General’s comparable-store sales growth story is impressive. Fiscal 2016 was the 27th consecutive year of comparable-store sales growth for the company. In first-quarter fiscal 2017, comps increased 0.7%. Same-store sales growth is still anticipated in the band of slightly positive to 2% for fiscal 2017.

Moreover, the company which shares space with Dollar Tree, Inc. (NASDAQ:DLTR) , Burlington Stores, Inc. (NYSE:BURL) and Target Corporation (NYSE:TGT) is expanding its cooler facilities to enhance the sale of perishable items, and is also rolling out DG digital coupon program. Sales at the consumables division continued to improve in first-quarter fiscal 2017. The company’s model includes earnings per share annual growth target of 10–15% and net sales increase of 7–10%.

However, reduction in SNAP benefit has been haunting Dollar General for a long time and with chances of President Trump’s proposed food stamp cut getting passed, the situation could get worse. Trump is suggesting on reducing food stamps program by $193 billion, which is approximately 25% of the budget for the program. Cut in SNAP benefit will hamper Dollar General performance as people with low income will have less money to spend and could restrict spending to low margin products. The company has also stated that cut in SNAP program has impacted 56% of store base.

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