After having highlighted what I think will be
) deleterious affect on
) from its growth of Neighborhood Market and Wal-Mart Express (see
For Family Dollar, Wal-Mart Threat Is More
Serious Than Expected
), I felt that I should provide some perspective for
) as well.
I believe that Dollar General is a stronger company than Family
Dollar. I disagree with those who believe that FDO can near Dollar
General's sales per square foot level anytime in the next four
While I would not believe the recent Kantar pricing survey showing
Dollar General's prices to be .4% below Wal-Mart's (one survey of
only a $29 market basket of goods is certainly not statistically
valid), I do believe that its 2-3% level higher than Wal-Mart can
be defensible. Possibly some of its Dollar General markets could be
big enough for pharmacies in the future, one of the big advantages
that many smaller Wal-Marts will have.
While I expect Family Dollar to start feeling the competition in
calendar year 2015 and certainly by 2016, my best guess is that
Dollar General will not start to feel it intensely until 2017.
Assigning Dollar General stock, at $60, a 6.0% risk discount (half
a percentage point less than FDO) and a 4.2% risk-free rate on my
earnings discount model, and calculating the implied growth rate
through 2016, I get 12%.
That would imply what I think the Street sees as conventional
wisdom for Dollar General, namely, growing square footage at 6.5%
with 3-4% same-store sales and some SG&A leverage. My
conclusion is that the present valuation, for whatever reason,
reflects Wal-Mart's bigger competitive threat, though I do not
believe that investors are specifically thinking about that issue.