Morningstar | Solid 2Q Has Dollar General on Track to Meet Our Targets; Shares Trade Fairly
After narrow-moat Dollar General reported second-quarter earnings consistent with our long-term outlook, we do not anticipate making a large change to our $98 fair value estimate. Similarly, our long-term outlook is intact, calling for mid-single-digit annual top-line growth against high-single-digit adjusted operating margins, on average, over the next decade. While we have a favorable view of the firm and its sector, we suggest investors await a more attractive entry point before building a position.Dollar General saw 10% sales growth on 3% same-store sales expansion through the first half, against an 8% operating margin. Management reiterated its diluted earnings per share guidance of $5.95-$6.15, consistent with our $6.07 preannouncement forecast, with leadership calling for 9%-9.3% top-line growth and flat operating margins (our mark was based on 8% revenue expansion and also did not include a change in profitability).
We continue to expect Dollar General to successfully ward off competition from digital retailers, a consequence of its modestly priced items and the convenience that its store network provides. Still, we are encouraged that the firm is testing ways to use technology to boost traffic. Management reported that its digital coupon offering has expanded to around 14 million subscribers, from 10 million a year ago, and that it is testing ways to allow customers to scan items using their cellular phones to make in-store purchases without a trip to the register. We believe that such investments can bolster Dollar General's perceived value to its customers by emphasizing its low prices and making the shopping experience more convenient, ultimately boosting the brand intangible asset that we think forms part of the firm's narrow economic moat. Additionally, the tools should allow Dollar General greater insight into shopper buying behavior, allowing it to sharpen its assortment and procurement strategies.
Dollar General is a discount retailer. The company's consumables products includes paper and cleaning products, packaged food, perishables, snacks, health and beauty, pet, and tobacco products. The company's seasonal products include decorations, toys, batteries, small electronics, greeting cards, stationery, prepaid phones and accessories, gardening supplies, hardware, automotive and home office supplies. The company's home products include kitchen supplies, cookware, small appliances, light bulbs, storage containers, frames, candles, craft supplies and kitchen, bed and bath soft goods. The company's apparel includes casual everyday apparel, as well as socks, underwear, disposable diapers, shoes and accessories.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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