Dollar General Analyst Sees Multiple Drivers For Market Share Growth

Investor meetings with Dollar General Corp. DG highlighted that the chain's management remains bullish about the company’s long-term prospects — but also cautious about the weakening financial conditions of core customers, according to Raymond James.

The Analyst

Raymond James’ Dan Wewer maintains a Strong Buy rating on Dollar General.

The Thesis

Dollar General is expected to achieve square-foot growth of 5.9 percent in 2019 after a 5.5-percent expansion in 2018, Wewer said in a Friday note.

It ranks among the fastest-growing companies in hardline retail, the analyst said.

The company already has stores in 15,370 locations nationwide and plans to open another 975 in 2019, Wewer said. Overall, Dollar General sees an opportunity for an additional 12,000 U.S. stores, he said.

The retailer's guidance implies 2.5-percent same-store sales growth in 2019, with a part of this being driven by the maturation of new store openings, relocations and remodels, the analyst said. Dollar General has initiatives in place to increase same-store sales by another 100 bps this year, he said.

The company’s EBIT margin will be impacted by an estimated 20-bp headwind related to the rollout of DG Fresh and Fast Track, Wewer said. DG Fresh is already in 300 stores, and the company plans to increase that number to 5,000 by the end of the year, he said.

Both DG Fresh and Fast Track are expected to turn accretive in 2020, the analyst said.

Surveys indicate that Dollar General’s core customers, who are 45-60 years old with household income of $35,000 or less, are less optimistic about their spending power than they were six months ago, according to Raymond James.

Since the company’s core customer group has historically been the first to be affected by an economic slowdown, the survey suggests a more broad-based economic slowdown in the U.S. will begin in the second half of 2019, Wewer said.