Image Source: Dollar General Corporation – May 2016 Investor Day Presentation
By Callum Turcan
Dollar General Corporation (DG) is now trading near its all-time highs after rising ~8.5% year-to-date, at a time when the S&P 500 (SPY) is down almost 15%, as of the end of normal trading hours on April 9. We include shares of DG in our Best Ideas Newsletter portfolio and recently covered some of Dollar General’s operational updates in our ‘US Beer Sales Reportedly Surge During the Pandemic, Dollar General Well-Positioned to Meet Rising Demand’ article that can be viewed here. We are following up on that piece, and our note covering Dollar General’s most recent financial updates that can be viewed here, to highlight how Dollar General is maintaining its liquidity position during these harrowing times.
The ongoing coronavirus (‘COVID-19’) pandemic is wreaking havoc on global economies and staying on top of debt maturities is a key part of maintaining the funds needed to meet surging demand for consumer staples products (keeping inventory management and other considerations in mind). Shares of DG yield ~0.9% as of this writing.
Balance Sheet Maneuvers
Dollar General carries quality investment grade credit ratings (BBB/Baa2) and that includes quality commercial paper (‘CP’) credit ratings as well (A-2/P-2), according to its Fiscal 2019 Annual Report. For reference, please note Dollar General’s fiscal 2019 ended January 31, 2020. Here’s a key excerpt from that report as it relates to Dollar General’s balance sheet health (emphasis added):
As of January 31, 2020, our consolidated balance sheet reflected outstanding unsecured CP Notes of $425.2 million classified as long-term obligations due to our intent and ability to refinance these obligations as long-term debt. An additional $181.0 million of outstanding CP Notes were held by a wholly-owned subsidiary and are therefore not reflected on the consolidated balance sheet.
Under this program, we may issue the CP Notes from time to time in an aggregate amount not to exceed $1.0 billion outstanding at any time. The CP Notes may have maturities of up to 364 days from the date of issue and rank equal in right of payment with all of our other unsecured and unsubordinated indebtedness. We intend to maintain available commitments under the Revolving Facility in an amount at least equal to the amount of CP Notes outstanding at any time. As of January 31, 2020, the consolidated outstanding CP Notes had a weighted average borrowing rate of 1.7%.
At the end of Dollar General’s fiscal 2019, the company had less than $1 million in outstanding ‘current portion of long-term obligations’ on its balance sheet along with over $2.9 billion in ‘long-term obligations’ and this is due in part to Dollar General classifying its $425 million in unsecured CP as long-term obligations. Please note that an additional $181 million in outstanding CP, held by a wholly-owned subsidiary, isn’t listed on Dollar General’s balance sheet according to the above disclosure. Dollar General had $240 million in cash and cash equivalents on hand at the end of fiscal 2019, and a current ratio a tad north of 1.1x.
Keeping this information in mind, on April 1, Dollar General announced it would issue out $1.0 billion in 3.500% Senior Notes due 2030 and $0.5 billion in 4.125% Senior Notes due 2050 on April 3. Those are attractive yield spreads over comparable US Treasuries as the WSJ reports the average investment grade corporate bond yield spread is around 250-255 basis points as of April 8, citing FactSet Research Systems Inc (FDS) data. Within the press release Dollar General reported (emphasis added):
The Company will use the net proceeds from the sale of the Notes for general corporate purposes, which may include the repayment of indebtedness.
In our view, it’s quite likely Dollar General will use some of those proceeds to pay down its CP borrowings given that this was the plan according to its Fiscal 2019 Annual Report. Dollar General clearly retains access to capital markets at attractive rates, and we continue to like the firm’s financial status as these funds will enable the company to refinance its CP borrowings and significantly bolster its liquidity levels. Having a solid current ratio and ample amounts of liquidity allows Dollar General to keep its stores stocked with goods in high demand while also having the funds to expand its physical store count, once it’s safe to do so of course (construction activities in many regions have been suspended due to the pandemic).
Concluding Thoughts
Dollar General’s strong technical performance of late is likely due to investors pricing in its impressive growth runway, in our view, a trajectory underpinned by strong same-store sales growth and new store openings. On May 27, Dollar General will hold its annual shareholders meeting and the dollar store operator may provide additional updates on its financial and operational status in the face of the ongoing pandemic. We continue to like Dollar General in our Best Ideas Newsletter portfolio.
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Dollar Store and Department Store Industries – KSS M JWN BIG DG DLTR PSMT
Specialty Retailers Industry – AAN BBBY BBY GME HD LOW LL ODP SHW TSCO WSM
Food Retailing Industry – CASY COST CVS KR SYY TGT WBA WMT
Related: AMZN, FDS, SPY
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Callum Turcan does not own shares in any of the securities mentioned above. Cracker Barrel Old Country Store Inc (CBRL) is included in Valuentum’s simulated Dividend Growth Newsletter portfolio. Dollar General Corporation (DG) is included in Valuentum’s simulated Best Ideas Newsletter portfolio. Some of the other companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.