Discount retailing is sometimes more profitable than you might think. Dollar General, which released its results last Friday, proves it with growth and margins higher than Walmart.
The latest figures invite a look at the ten-year financial performance, i.e., the 2013-2023 period, which is excellent by any measure for the Tennessee-based group and its 18,774 stores.
Sales increased from $16 billion to $38 billion over the period, while the operating margin remained remarkably stable at around 10%. Inflation has weighed a little on profitability over the past year, but it has been well absorbed by an increase in sales.
The latter, it should be noted, is itself a consequence of inflation, which is pushing consumers to redirect their purchases towards discount stores. The charm of this positioning is therefore to offer a good hedge against economic hazards.
Known for its excellent management, Dollar General clearly outperforms its less profitable rival Dollar Tree. Over the period 2013-2023, the former generates a total of $17.5 billion in profits, all of which is returned to shareholders via dividends and share buybacks.
The number of shares outstanding is thus decreasing by one third. This cocktail of growth, well-defended margins and cannibalized capital allocation has literally quadrupled earnings per share, from $2.8 in 2013 to $10.7 this year.
Over the decade, the market has pinged Dollar General's value, from a low of x15 earnings to a high of x30 earnings. These swings reflect the recognition of a remarkable performance, mixed however with the fear that the group has exhausted its growth potential.
In this regard, management announced eighteen months ago its intention to diversify into consumer pharmaceuticals in order to pursue a new growth driver. Whether this effort succeeds or not, the sustained share buybacks should in any case allow for the continued expansion of earnings per share.
A return of the valuation to the low end of x15 earnings would likely represent an attractive entry point.
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