Will Solid Comps Performance Lift Dollar General (DG) Stock?

We believe that Dollar General Corporation’s (NYSE:DG) commitment toward price management, cost containment, private label offering, effective inventory management, merchandise and operational initiatives should drive sales and margins. Evidently, Dollar General’s comparable-store sales growth story is impressive. However, higher SG&A costs are a threat to margins.

We note that fiscal 2017 was the 28th consecutive year of comparable-store sales growth for the company. Through 2017, comps increased 0.7%, 2.6%, 4.3% and 3.3% in the four quarters respectively. Markedly, the solid trend was maintained in the first quarter of fiscal 2018, wherein comps grew 2.1% on higher average transaction.

Moreover, in order to increase traffic, Dollar General is focusing on both consumables and discretionary categories. In fact, the rollout of tobacco has been a key factor driving traffic. In addition, the company is expanding its cooler facilities to enhance the sale of perishable items and is rolling out the DG digital coupon program as well. Sales at the consumables division continued to improve, driving comps and market share in first-quarter fiscal 2018.

Well, this Zacks Rank #3 (Hold) company is trying to expand its store base continuously to drive customer count. The company anticipates to open 900 stores, remodel 1,000 and relocate approximately 100 in fiscal 2018. Moreover, Dollar General is focusing on smaller format stores as these require less capital expenditure and will help to cope with space constraint.

All said, the company’s robust comps history along with its efforts to expand by opening new stores have instilled confidence in investors. Although Dollar General’s shares that have rallied 2.4% in the past month, underperforming the industry’s gain of 4.5%, we believe these efforts will help the stock rebound.

On the flip side, the company is incurring higher SG&A expenses to attract customers and counter competition. During the first quarter, Dollar General’s SG&A expenses, as a percentage of sales, rose 60 basis points (bps) to 22.4%, which also impacted operating margin.

The rise in SG&A expense rate was because of elevated retail labor, occupancy and utility costs. Also, increased property taxes on lease stores led to the increase. Management stated that a major chunk of the SG&A rate deleverage was a result of accelerated store investments and increased utility costs.

As Dollar General is committed toward investing in store expansion, cost hurdles associated with the same are a threat to margins. Apart from this, the company is facing higher freight and fuel cost-related challenges, which are expected to alleviate over time.

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