Image shown: Dollar General has exceeded the market’s return by more than 50 percentage points since being added to the simulated Best Ideas Newsletter in April 2017.
The dollar stores are a nice area to be when the economic environment grows more uncertain, and we continue to like Dollar General as the play in this area. It remains a staple in the Best Ideas Newsletter portfolio.
By Brian Nelson, CFA
There may be one certainty when it comes to the economic environment, and that is uncertainty. The markets have had one of the best bull-runs in history since the doldrums of the March 2009 bottom, and perhaps nobody could have predicted the magnitude of the pace of economic expansion since then, let alone that Donald Trump would not only be President of the United States, but also that corporate tax reform would be passed with ease. I truly believe that the situation that we are experiencing today in the current market environment has been the best-case scenario since the Financial Crisis.
Will the good times keep going? That’s the question on everyone’s minds. Our general thesis regarding concerns about market structure aren’t going away, and many others continue to point to cracks in the economy, with perhaps the shot across the bow coming from Apple (APPL) last week, which only heightened concerns across the entire tech supply chain, but also at companies serving the high-end fashion consumer. All eyes are on the health of China (FXI, MCHI), too, and with all the trade deal wrangling that has been going on, the global economic environment may finally be feeling some tremors.
That doesn’t much matter for domestic dollar-store giant Dollar General, however. As of November 2, Dollar General (DG) operates 15,227 stores in 44 states, and we doubt its primary consumer is going to feel the pinch from market structure or trade tremors with China. The dollar store industry serves customers in the low- and middle-income brackets, with more than one third of the industry’s customers living in households that earn less than $20,000 per year. These customers don’t have money tied up in the stock market, and the ranks of this demographic may only grow if the US does encounter a recession.
We view Dollar General as relatively recession-resistant, probably as recession-resistant as some of the garbage haulers that we are anxiously awaiting “entry points” to reconsider. The dollar store operator is simply a model for consistency. Fiscal 2017 marked Dollar General’s 28th consecutive year of positive same-store sales growth, and the company’s cash-flow profile remains solid. The idea was originally added to the simulated Best Ideas Newsletter in April 13, 2017 at $68.83, and despite a very difficult market environment, shares have rocketed to $112.94, as of January 7, 2019.
We couldn’t be more pleased, but we don’t think Dollar General’s run is over yet. The company’s recession-resistant business model, knack for generating consistent same-store sales growth, cash-rich operations, and strictly US-based profile speak to a great idea in today’s uncertain global economic times. As others in the dollar-store space such as Dollar Tree (DLTR) are being pressured by activist investors to raise product prices, Dollar General’s competitive position only improves. We’re liking what we’re seeing of late at Dollar General.
Related: FIVE, WMT, TGT, WBA
Retail – Discount: BIG, DG, DLTR, FRED, PSMT
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Brian Nelson does not own shares in any of the securities mentioned above. Some of the companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.