Dollar General: Undervalued Discount Retailer with Strong Unit Economics

Christopher Bloomstran of Semper Augustus Investments Group presented his in-depth investment thesis on Dollar General (NYSE: DG) at Best Ideas 2018.

Dollar General is a low-cost discount retailer with strong unit economics and a reasonable ability to grow store count by mid-single digits and EPS by 10% annually for many years. Store location and format provide a competitive advantage versus all forms of competition, including online. Through operational initiatives, the business can modestly expand EBIT margins and returns on capital employed and on incremental capital invested.

Weakness across traditional retail (generally justified), coupled with commodity deflation (temporary) and a decline in SNAP benefits (perhaps not temporary for the political cycle) weakened DG shares in 2017 to a reasonably attractive level. A purchase at the recent ~5% earnings yield may combine with multiple expansion of 20+% and create a long-run result that approaches the ROC of the business of 15+%.

A five-year estimate would have the business producing $35 billion in revenue among 18,500 stores and EPS of $7 per share, up from $23.5 billion, 14,500 stores, and $4.52, respectively, most recently. At a payout of 25%, dividends would be $1.75 versus $1.00 recently. At the current run rate of capital investment, the combination of new store openings, distribution infrastructure, remodels and relocations, dividends, and share repurchases cannot be funded entirely with operating cash flow.

To finance incremental net store growth of 1,000 units annually over the next five years and to maintain capital initiatives, net new debt of $2 billion will be required, excluding operating leases. Chris’s preference would be reduced share repurchases and a more equity-rich balance sheet. Overall, however, Dollar General presents a compelling growth opportunity in a brutally difficult retail environment.

About the instructor:

Christopher P. Bloomstran, CFA , is the President and Chief Investment Officer of Semper Augustus Investments Group LLC. Chris has more than 20 years of investment experience with a value-driven approach to fundamental equity and industry research. At Semper Augustus, Chris directs all aspects of the firm’s research and portfolio management effort. Prior to forming Semper Augustus in 1998 – in the midst of the stock market and technology bubble – Chris was a Vice President and Portfolio Manager at UMB Investment Advisors. While at UMB Investment Advisors, Chris managed the Trust Investment offices in St. Louis and Denver. Among his investment duties at the firm, he managed the Scout Balanced Fund from the fund’s inception in 1995 until 1998, when he left to start Semper Augustus. Chris received his Bachelor of Science in Business Administration with an emphasis in Finance from the University of Colorado at Boulder, where he also played football. He earned his Chartered Financial Analyst (CFA) designation in 1994. Chris is a member of the CFA Society of St. Louis and of the CFA Institute. He has served on the Board of Directors of the CFA Society of St. Louis since 2002, where he was elected to sequential terms as Vice President from 2005 to 2006, President from 2006 to 2007 and Immediate Past President from 2007 to 2009. For several years Chris served as a member of the Bretton Woods Committee in Washington DC, an institution championing and raising awareness of the International Monetary Fund, the World Bank and the World Trade Organization. He has also served on various not-for profit boards in St. Louis. His family resides in St. Louis and he has volunteered as a coach of many of his two children’s athletic teams.

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