Dollar General Corporation $DG
A valuation into Dollar General Corporation (Could it be a bank?)
Dollar General Corporation is growing variety store retail chain based out of Goodlettsville, Tennessee. The company offers a broad array of merchandise, home products, apparel, consumables, and seasonal goods at discounted prices from both national and private labels. The typical store is operated by a store manager, assistant store managers, and three to five associates. Dollar General locations are built or refurbished to achieve low maintenance costs, low operating costs, and are focused on a range of offerings that generate strong cash flow and capital investment returns.
Dollar Generals are located across the United States (with the exception of Hawaii, Alaska, and Montana) and they are growing rapidly. These places seem to be popping up left and right just about everywhere you go. In my general area there have been five additional locations built in the past three years, all within a 20-mile radius. At 2021 year end they had over 18130 store locations in the United States. In 2022 they intend to open an additional 1100 stores for an approximate total of 19230. There are also plans to open ten stores in Mexico in the coming year, kicking off their multinational expansion. Dollar General aims to serve low income and fixed income households in areas that are underserved by other retailers. That said, the store does seem to attract customers from a wide range of income brackets and life stages.
Over the past decade, Dollar General has significantly grown revenues. Much of this from store expansion. Same store sales did decrease in 2021 by approximately 2.8% breaking a 31-year track record of consecutive same store sales growth. Management attributed this to unusually high sales in 2020 and supply chain issues. Personally, I am skeptical of this idea and question if same stores sales are being affected by over saturation of their own stores. Earnings per share has increased in line with revenue. Since 2016, Dollar General has grown and paid an annual dividend. Margins have maintained and return on invested capital has ranged between 11% and 17%. In the past decade the company has reduced shares outstanding by approximately 30%, repurchasing a total of 12.1 million shares in 2021. Further repurchases are approved for 2022 assuming they don’t exceed a certain dollar maximum. The company has a reasonable payout ratio and free cash flow was down for 2021 but has an overall uptrend.
In order to finance much of its growth, Dollar Generall has increased long term debt significantly in the past few years. Much of this has been done through senior notes due between 2023 and 2050. Interest on those notes are between 3.25% and 4.125%. Interest expense was $157.5 million for 2021.
Moving into 2022, Dollar General plans to add self checkpout options in 11000 of of its stores. They are also launching some financial service options. Dollar General has launched Spendwell, a bank account that centers around the ability to give customers convienience and assesability to manage personal finances. This will be exclusive to Dollar Generals, made possible through InComm Payments and issued by Metabank. The account comes with a Visa debit card that allows customer to earn 1% cashback on Dollar General purchases. Spendwell accounts also include direct deposit, ability to add cash, online bill pay, and subaccounts for other family members. Dollar General also plans to test a buy now, pay later program via a partnership with Sezzle. This will give customers the ability to pay for purchases in up to four installments and will give added flexibility for instore pick-up services offered within the Dollar General app.
In furthering my due diligenace, and to build onto a theory I have for the future of Dollar General that I will go into later, I did some research on MetaBank. MetaBank is a traditional bank based out of South Dakota and generally serves the needs of individual, agricultural, and business customers. In 2016, MetaBank won a selection by the Treasury’s Bureau of the Fiscal Service to be the issuer for the Treasury’s U.S. Debit Card program. The U.S. Debit Card Program provides prepaid debit card services to federal agencies for the electronic delivery of non-benefit payments. Fast forward to 2020. MetaBank played a key role in the disbursment of Economic Impact Payment (“EIP”) stimulus payments through prepaid cards. In 2021, they would again assist in the disbursment of EIP payments through the American Rescue Plan Act.
InComm is a global leader in innovative payment technology. They have been partnered with Dollar General for almost 20 years. Mid 2021, InComm partnered with Flexa, a leading pure-digital payments network allowing businesses using InComm the ability to accepts Bitcoin, Ethereum, Litecoin, Stablecoins, and other crypto currencies. One of Flexa’s top offerings is there SPEDN app allowing users to make purchases at entertainment and retail companies including Barnes and Noble, Baskin Robbins, Bed Bath and Beyond, GameStop, Lowe’s, Nordstrom, Wholes Foods, Petco, and others. It would not surprise me to see Dollar General added to this list in the near future. If you want to try this out or learn more go to www.flexa.network. It’s a great website to, check out their other apps and solutions, learn about digital payment transactions, crypto currencies, and what wallets they are compatable with.
In performing a discounted cash flow model on Dollar General I came up with a fair value of $263. This is assuming an ROIC of 14%, a WACC of 6%, and a revenue growth rate starting at 9%. Dollar General currently trades at $226.30 giving it a slight margin of safety at 14%. With regard to valuation ratios, Dollar General is trading towards the high end of its historic price to earnings, price to book, and price to sales.
Overall, I believe Dollar General is a solid company with strong cashflows, growth prospects, and competitive position in the area of retail consumables. They are focused on growth and improving shareholder value. Dollar General is an essential company and has weathered the Covid Pandemic well. Some of their product offerings were negatively affected by supply chain constraints. Supply chain issue certainly have the potential to be an ongoing threat moving forward. Some other potential threats to Dollar General are reduction a in consumer spending due to negative economic factors, high competition, inventory shrinkage, negative factors affecting their digital initiatives, and a deterioration in the credit market.
In reviewing Glassdoor reviews, Dollar General does not come across as a great place to work in terms of pay. Wages come in rather low compared to the industry average and I question if this will catch up to them eventually having a negative effect on margin. On the upside, the company has high rates of internal promotion. They offer college tuition benefit and other programs allowing their workforce to move up and earn higher wages. An example of this is the drivers training program for staff interested in driving for Dollar General.
One of the reasons that Dollar General fell on my radar is that I am completely blown away by the number of stores built in my area in recent years. I find it hard to believe that there is not an over saturation of stores resulting in a dilution to same store sales. Dollar General seems to have competent members on their board, so I started to explore the idea that there is strategy behind this rather than it being a mistake. Only time will tell but I believe that Dollar General has goals far beyond being a major variety store chain. In recent years, Dollar General has expanded their digital and financial offerings. Their existing partnership with Western Union for money transfers and exclusive Spendwell bank account and debit card are the best examples of this. Dollar General may not just be trying to be our local convenience/variety store but also our bank. And if that is the case then they are certainly strategically positioned. There are 18190 Dollar General stores as of fiscal year 2021 and more coming. That is more than the branches of the top five banks in the United States combined. If we take the square mileage of the United States excluding Alaska, Hawaii, and Montana where Dollar General is not located then we would have a store every 169 miles. As online banking grows in popularity brick and mortar banks will become less common and Dollar General will be a convenient alternative for those who prefer something more traditional. It’s hard to say exactly what this would look like especially if the United States decided to adopt a central bank digital currency (CBDC) or digital dollar. Dollar General has the potential to become a hub for people to securely transact payments and have access to banking whether that be Spendwell or others via ATMs. It may also be worth mentioning that Todd Vasos, the CEO of Dollar General, is also on the board of KeyCorp or Key Bank as they are more commonly known. A move into the personal banking area would certainly provide a whole new level of growth for Dollar General and convenience for the communities it serves.
At this time, I intend to wait and see on the future of Dollar General. Although there is a margin of safety in my calculated fair value, I would prefer to see something more before considering an investment. I will be carefully watching the development of the company’s financial services area and how successful it is in bringing people onto the Spendwell program. There are certainly a lot of financial service connections and possibly strategic partnerships active within Dollar General. I will also be watching hiring patterns to see if there is anything there that catches my eye.