My 2 Cents on Why I Like Dollar General After Its Earnings Beat

Dollar General Is Poised for a Big Upturn: Here's Why

Budget-minded retailer Dollar General (DG) released fiscal fourth- quarter financial results, revealing unadjusted earnings per share of $1.83 on revenue of $10.911 billion. The top-line number beat Wall Street and was good enough for year-over-year growth of 5.8%. The bottom-line print simply crushed expectations. Same-store sales grew 4.3% from the year ago period. This too, easily beat the 3.2% growth that the street had in mind.

Sales By Category:

- Consumables... grew 5.5% to $8.772 billion.

- Seasonal... grew 8.2% to $1.206 billion.

- Home Products... grew 8.6% to $643.8 million.

- Apparel... grew 3.5% to $289.3 million.

Operations

As net sales grew 5.8% to $10.911 billion, the cost of those goods sold increased 4.3% to $7.589 billion. This left a gross profit of $3.322 billion (+9.6%), on gross margin of 30.45%, up sharply from 29.4%. Operating expenses actually contracted 0.7% to $2.716 billion. This left an operating income of $606.3 million (+106.1%) as operating margin improved from 2.86% to 5.56%.

After accounting for interest, other income & expenses and taxes, unadjusted net income landed at $426.3 million (+123%). This works out to $1.93 per fully diluted share, up from the year ago comp of $0.87. The quarter reported was strong. In fact, it was very strong. Yet, the shares are trading lower this morning. Let's figure out why.

Guidance

For the new fiscal year, Dollar General is projecting net sales growth of 3.7% to 4.2%. This puts the midpoint of the range well below the 4.2% growth expected by Wall Street. Same store sales are seen growing 2.2% to 2.7%. The street was looking for 2.45%, so this particular guidance is in line with estimates.

Unadjusted EPS for the current full year is projected to land in between $7.10 and $7.35, assuming a negative impact of $0.13 related to the expiration of the Work Opportunity Tax Credit as of year's end 2025. Wall Street was looking for a rough $7.25, so at the midpoint, this is a little light as well. The guidance is lighter than expected, given the strength of the quarter reported. That is the primary reason for this morning's selloff.

Fundamentals

For the full fiscal year completed, Dollar General generated operating cash flow of $3.635 billion. Out of that number came capital spending of $1.241 billion, which left free cash flow of $2.394 billion. Out of that total came $520 million in cash dividend payments to shareholders. The firm has not recently and will not soon be repurchasing any common stock for its corporate treasury.

Turning to the balance sheet, Dollar General ended the quarter with a cash position of $1.139 billion and inventories of $6.332 billion. This brings current assets to $7.898 billion. Current liabilities add up to $6.961 billion including shorter-term debt of just $14.4 million. That puts current ratio at 1.13, which is adequate for most companies, but actually rather strong for a retailer. Given the inventory-reliant nature of the business, there really is no need to figure out quick ratios here or really for any chain retailer.

Total assets amount to $30.964 billion. This includes $5.539 billion in goodwill and other intangibles. At 17.9% of total assets, this is not a concern. Total liabilities less equity comes to $22.452 billion, including long-term debt of $4.566 billion. In my opinion, this is a stronger than expected balance sheet for the nature of the business that this firm is in.

My Take

Cash flows are strong. The balance sheet is stronger than I thought it would be prior to getting started on this analysis. Same store sales growth has been strong. Guidance is weak. Is that guidance conservative? Maybe. If the U.S. economy goes into a weaker period of labor demand and consumer activity, retailers that focus on budget-minded households will do better. Increased tariffs might hurt, but we are not quite there yet from where we were. I am intrigued.

Readers will see that DG blasted out of a double bottom pattern of bullish reversal back in early December. Readers can also see that DG fell from grace after developing a rising wedge pattern of bearish reversal. The stock reacts very well to its technicals. Readers will also see the gap left behind by this morning's selloff.

Relative Strength is weak as is the daily moving average convergence divergence, so the indicators are indeed telling us that there could be more to this selloff. That said, I see cause to start accumulating this name and I may start doing so later today. The stock only trades at 22-times forward looking earnings, which is not crazy for a retailer with impressive cash flows and a decent balance sheet. The 1.6% yield is not impressive, but it is not zero either. I would like to see if I can get the stock a little closer to its 200-day simple moving average than it is now. Consider this name to be one in the Sarge-folio's bullpen.

At the time of publication, Guilfoyle had no position in any security mentioned.