Unrivaled Store Footprint Drives Upside Potential

Articles From: New Constructs
Website: New Constructs

This retailer is positioned well to grow its top and bottom lines over the long term, but the stock is priced as if profits will fall below pre-pandemic levels. Dollar General (DG: $206/share as of time of publication) is this week’s Long Idea.

DG presents quality risk/reward given Dollar General’s:

  • largest brick-and-mortar footprint in the U.S.
  • rising market share and same-store sales
  • small low-cost store format is difficult for competitors to replicate
  • high profitability, especially capital turnover, amongst peers
  • strong growth opportunities

Largest Brick-and-Mortar Footprint in the U.S.

With a store within five miles of 75% of the U.S. population, Dollar General offers many millions of consumers convenience and creates strong brand awareness.

At the end of 2020[1], Dollar General operated 17 thousand stores, more than Dollar Trees’ (DLTR) ~15,700 stores, 1.9X the number of Walgreen’s (WBA) stores, and 1.2x the combined store count of Walmart (WMT), Kroger (KR), Target (TGT), Big Lots (BIG), Five Below (FIVE), and Albertson’s (ACI), per Figure 1.

Figure 1: Dollar General’s U.S. Store Count Vs. Competition – 2020

Dollar General’s U.S. Store Count Vs. Competition - 2020

Sources: New Constructs, LLC and company filings.

Brick-and-Mortar Footprint Is Growing and Taking Market Share

Dollar General is aggressively expanding its footprint. Per Figure 2, Dollar General’s share of U.S. retail stores grew even more during the pandemic as many weaker operators closed stores. Dollar General stores comprised 5.2% of all U.S. brick-and-mortar stores in 2020, up from 3.5% in 2018. The firm plans to add an additional 1,050 stores in 2021.

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This article originally published on October 6, 2021.

Disclosure: David Trainer, Kyle Guske II, Alex Sword, and Matt Shuler receive no compensation to write about any specific stock, style, or theme.

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[1] Dollar General’s last fiscal year ended January 29, 2021, which we refer to throughout the report as 2020.

[2] Five Below’s TTM ROIC is up from 9% in 2020 and may not be sustainable going forward. Five Below’s 2-year average ROIC of 12% is well below Dollar General’s 2-year ROIC of 14%.

[3] Only Core Earnings enable investors to overcome the inaccuracies, omissions and biases in legacy fundamental data and research, as proven in Core Earnings: New Data & Evidence, written by professors at Harvard Business School (HBS) & MIT Sloan and published in The Journal of Financial Economics.

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Disclosure: New Constructs

David Trainer, Kyle Guske II, Sam McBride, Matt Shuler, Alex Sword, and Andrew Gallagher receive no compensation to write about any specific stock, style, or theme.

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