Are Dollar General’s Prices Going to Kill its Business?

Dollar General (DG) has been on a roll for quite some time now. Though plenty of community leaders are turning against the bargain-basement store as it is supposedly a disruptive force in the context of local economies, it appears as though this American stalwart is here to stay. The question is whether the company can continue to make money selling items at absurdly low prices.

Walk into your local Dollar General store, and you will likely find much more inventory than you imagined. From uber-cheap and disposable dishware to beverages, frozen items, can openers and beyond, Dollar General has just about everything. Those who shop at Dollar General at a high frequency will admit some of the store’s items do not stand the test of time. Other Dollar General shoppers complain they have to wait an extended period of time at the checkout line. However, Dollar General provides shoppers with affordable items that serve myriad functions. Even if the in-store experience takes a bit longer than other stores, Dollar General customers save plenty of money when shopping at this discount store.

Though Dollar General was not a public company during the Great Recession, its stock jumped in the years after the economic meltdown. All in all, Dollar General increased 520% in the past decade. Part of the reason why Dollar General has spiked is the fact that it has expanded much more quickly than other retailers. The beauty of Dollar General is it is likely to succeed if the economy is faltering and also when it is firing on all cylinders. The company’s DG Fresh frozen/refrigerated products will help Dollar General minimize costs while expanding its customer base all the more. Even if the economy struggles, the public will undoubtedly continue to buy frozen and refrigerated foods at low costs. However, bargain-hunters will continue to shop at Dollar General even if the economy is in tip-top shape.

Dollar General’s digital coupons have been outrageously popular with customers. The company’s mobile apps as a whole have generated important inroads with new customers, especially those in the desired millennial age cohort. If the United States economy were to slide into another recession, Dollar General’s digital coupons should prove quite appealing to households lacking considerable discretionary income. Though the economy seems strong, more and more economists are indicating there are dark clouds ahead. Dollar General investors can rest easy knowing their investment will likely appreciate in value regardless of which direction the economy goes.

No single retailer is set to open more locations than Dollar General. This is quite the surprise considering the fact that retailers in the United States and beyond are shuttering their doors left and right. Indeed, Dollar General is an enigma of sorts. While other American retailers closed in excess of 7,000 stores last year, Dollar General just keeps opening one new store after another. Dollar General launched 240 brand new locations in the first quarter of 2019 alone. The company plans nearly 1,000 new locations for the entire year. This figure exceeds that of Dollar Tree, a retailer set to open 550 stores this year. Dollar General even has the red-hot Aldi beat in terms of new stores. Aldi plans on opening a mere 130 new locations in 2019. At this point, it should be clear there is a theme emerging from today’s most successful retailers: the top five retail stores opening in 2019 are discount sellers.

Dollar General investors are justified in worrying about the trade war with China. Freight costs are reducing profit margins as a result of new tariffs placed on products coming from China. The low-cost retailer will suffer even more if higher tariffs arrive later this year. Any escalation in trade tensions is likely to damage the company’s business, as the bulk of its goods are derived from China.

Dollar General executives are proud of the fact that the company’s net sales should spike about 7% this year. Comparables are poised to increase more than 2%. Though the company’s earnings per share are nearly 10% higher than last year’s, the expected range is below the $6.65 per share expected by Wall Street analysts. Sales are likely to continue to rise as Dollar General adds more self-checkout stations to hasten the checkout experience. Furthermore, the company’s brass made the shrewd move of shifting supply chain operations internally to reduce costs all the more.

It is certainly possible the Chinese walk away from the negotiating table and Trump adds even more tariffs, harming businesses such as Dollar General. However, those in-the-know agree the tariffs affecting companies like Dollar General are only temporary. The coast looks clear once we overcome the tariff hurdle. Furthermore, just about everyone will become a fan of this discounter once its self-checkouts are installed. Buy DG, hold it for years and it will likely increase in value.

Regards,

Ethan Warrick
Editor
Wealth Authority

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