We're not even halfway through 2019 and already the number of store closures announced by U.S. retailers far exceeds the number shuttered through all of last year. Data from Coresight Research shows American retailers have announced plans to close 7,222 stores, 23% more than the 5,854 announced in all of 2018. It estimates the number of closures could reach 12,000 this year.
But the retail apocalypse is not hitting every retailer, and some are actually in expansion mode. Coresight says almost 2,800 stores will open this year, some 1,800 of which will be discount retailers. The segment is proving to be resilient in both good times and bad -- especially if a trade war worsens. But no retailer is opening more stores than Dollar General (NYSE: DG). And this just might be an indication that the deep discounter is a buy.
Dollar General is cashing in on the strength of discount retailing. Image source: Dollar General.
First stage of growth
Dollar General is on a roll. Its first-quarter earnings easily beat analyst expectations as it posted net profits of $385 million, or $1.48 per share, on an 8.3% increase in revenue, which rose to $6.6 billion. Comparable-store sales also jumped 3.8%, beating forecasts of a 2.8% rise, as it benefited from a combination of more customers coming into its stores and spending more while there. That's something many other retailers haven't been able to accomplish, even when they've reported strong same-store sales.
Driving the repeat business has been the addition of more consumables like fresh produce and drinks, though it lowers gross profit margins. Dollar General is able to offset this, however, through a reciprocal halo effect in nonconsumables, which in turn actually lifts margins higher for the entire store.
The positive consumer response is allowing it to go on a massive expansion campaign. CEO Todd Vasos said the chain opened 240 new stores during the first quarter and plans 975 new locations for all of 2019. That is fully 35% of the total number of store openings announced so far.
And that puts it well ahead of rival Dollar Tree, which is opening a combined 550 stores between its namesake stores and the Family Dollar chain, and teen and tween retailer Five Below, which expects to open as many as 150 stores this year. Discount supermarket chain Aldi is scheduled to open 130 locations in 2019, meaning the top five retailers in store openings this year are all discounters.
Leveraging the opportunity
While Dollar General's expansion plans indicate there is a lot of runway left, perhaps equally important to the investment thesis are those existing stores the deep discounter is remodeling.
It has two remodeling types: its traditional one, which tends to have 22 refrigerator-freezer doors and typically delivers a lift of 4% to 5% on comps; and its Dollar General Traditional Plus (DGTP), which has 34 higher-capacity cooler doors on average, and generates a 10% to 15% comps lift, with more produce driving comps to the high end of this range.
The chain has hit on an effective real estate program that is both aggressive and focused, centering on transforming existing stores to operate at peak efficiency and then entering new markets by opening more stores to capitalize on the lessons it's learned.
The stock has responded to the good fortune it's reporting, rising 25% so far in 2019 and over 40% for the last 12 months. At 22 times trailing earnings and 18 times next year's estimates, the deep discounter is not overpriced. Going off at substantially less than twice its sales means that although it's not a bargain-basement stock, it is still an attractive one that is growing and has momentum.
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