Good for Risk-Averse Investors By TipRanks
Dollar General (NYSE:) has benefited from the COVID-19 pandemic, particularly in 2020 as it remained an essential business that stayed open while other businesses shut down.
The result was a 21.6% increase in revenue from January 2020 through January 2021. Now that the pandemic is mostly behind us, DG is expected to have slightly negative earnings growth, and low single-digit revenue growth for 2022, before returning to high single-digit growth.
Dollar General is neutral. (See Dollar General stock charts on TipRanks)
Dollar General operates in the retail industry, which is expected to grow at a CAGR of 4.5% from 2021 to 2026.
Dollar General has not been known for its online presence in ecommerce, which is the fastest growing retail segment. Despite not being heavy on e-commerce, Dollar General has still been able to consistently grow over the years through its strategy of opening new stores in rural areas where there isn’t much competition. Dollar General plans to open 1,035 new retail outlets by 2021. It has already closed 18.
The company is also venturing into healthcare by offering more health products on its shelves, and is planning on offering health services.
DG’s CEO Todd Vasos said that the reason for the move into healthcare is because about 65% of the company’s stores are located in “health deserts,” where people must drive long distances to get access to basic medical care.
This strategy is sensible and will help DG drive future growth. The company recently hired a Chief Medical Officer, indicating that it is serious about this move.
Retailers such as Dollar General need to hold billions of dollars’ worth of inventory in order to keep the business running. In order to predict success, it is important that a company’s ability to move inventory quickly and turn it into cash. To measure DG’s efficiency, we will use the cash conversion cycle which shows how many days it takes to convert inventory into cash. It is calculated by as follows:
CCC = Days Inventory Outstanding + Days Sales Outstanding – Days Payables Outstanding
Dollar Generals’ cash conversion cycle is 23 days, meaning it takes the company 23 days for it to convert its inventory to cash. It is much faster than the 39-day conversion time of Dollar Tree (NASDAQ) and Five Below (NASDAQ).
DG’s gross profit margins are 32.1%. This figure is better than Dollar Tree’s 30.8% margins, but worse than Five Below’s 35.8%. One important thing to note is that before COVID-19 gave a boost to DG, its gross profit and EBIT margins were on a slow, but steady downward trend, indicating that competition could slowly be chipping away at DG.
Wall Street’s take
According to TipRanks’ analyst rating consensus, Dollar General has a Strong Buy rating, based on unanimous 10 buys assigned in the past three months. The average Dollar General price target of $253.78 implies 15% upside potential.
Although Dollar General is a great recession-proof company that should do well over the long term, we are currently neutral due to its low growth, relatively low returns on capital, and slowly declining margins.
Stock Bros Research had no position at the time this article was published.
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