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Growing in Multiple Ways

Dollar General (DG) is growing profits in multiple ways. First, its increasing its store count. At the end of the last fiscal year (yr end Jan 31, 2015) the company had 11,800 stores. The plan was for 730 more this year and also remodeling 875 more (including increasing the cooler count which it has grown 50% since 2008) in addition to 900 more new stores next year. This combination 7% more sq ft, same store sales increases of 3%, and stock buybacks could push profits up 13% per year this year and long-term. The company also pays a 1% dividend, for a potential 14% total annual return. Management’s bought back $3 billion in stock since the buyback program started in December 2011.

Ten Year Chart

DG_2015_Q3_10yrLast qtr DG had 14% profit growth on 8% sales growth, which is a good return. It paid out a $0.22 dividend and bought back $200 million in stock.

Still, these figures were a little below what analysts expected (analysts wanted 3.6% same store sales growth and got only 2.8%). DG was touching a high of $82 multiple times this Summer, and is now down to $72 with the stock down due to the less-than perfect results and a stock market which is in a correction and has taken most everything down with it.

Fair Value

DG_2015_Q3_PHProfits have grownsteadily each year since DG went public again in 2009 (KKR took it private in 2007). The stock’s P/Es has risen from the mid-teens a few years ago to the high-teens now, as it should. With interest rates low stocks are more attractive and P/Es shoudl be higher. My Fair Value on the stock is 19x earnings. DG’s around where it should be now and has 20% upside to my 2016 Fair Value.

Sharek’s Take

Dollar General is growing in multiple ways — increasing its store count, revitalizing stores, buying back stock — and that’s a good formula for conservative growth. I feel the stock’s selling around where it should be, and has the ability to give investors estimated total returns of 14% a year.

View the Earnings Table here.
View the Profit History here.
View the Ten Year Chart here.

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