Is Dollar General’s Strength Forecasting Economic Weakness?

Over the holiday weekend, I noticed that a new Dollar General NYSE: DG store was getting ready to open in my area. I had heard that DG was one of the few retailers that were opening stores, so that wasn’t a surprise. However, it was surprising that this store wasn’t being built to replace an existing store located about a mile away. It was being built in addition to it.

And this store is in a solidly middle-class area. Not the “typical” target for Dollar General stores. This told me two things. Dollar General really is making good on their plans to open 1,000 new stores. And maybe the economy bears a bit more watching.

Dollar General just delivered a solid earnings report

 If you can call an earnings report a grand slam home run, then Dollar General delivered. When it came to earnings, Dollar General registered earnings per share (EPS) of $1.42 on net income of $365.6 million. This beat analysts’ expectations for and EPS of $1.38. The net income was nearly 10% higher on a year-over-year basis.

The company also recorded a beat in net sales which rose nearly 9% to $6.99 billion as opposed to the analysts’ estimate for $6.92 billion. And same-store sales growth increased by 4.6% which also exceeded analysts’ estimates of 3.34%. This was Dollar General’s fastest quarter of sales growth in five years.

But of course, investors are keenly interested in forward projections. Dollar General delighted investors with a robust full-year profit forecast that jumped from a range of $6.45-$6.60 to a range of $6.55-$6.65. The company is forecasting similar growth for same-store sales.

Are shoppers just addicted to bargains or is something else going on?

The overall economic numbers indicate the United States is not as close to a recession as was feared a few months ago. In fact, the third-quarter 2019 gross domestic product (GDP) was revised upwards to 2.1 (the prior estimate was 1.9).

However, there is still an unsettled feeling. The manufacturing sector is clearly in decline. Many economists are forecasting a slowdown in GDP in the fourth quarter. Overall wages have grown only modestly against this background.

The robust kickoff to the holiday shopping season seems to suggest that consumer confidence remains high. However, all may not be as it seems. The latest consumer confidence numbers showed the fourth straight monthly decline. And while the number still suggests a confident consumer, it is sharply down from the high that it reached 18 months ago.

Dollar General is building a moat

Dollar General caters to low- and middle-income consumers in rural and suburban areas. In fact, the average income for Dollar General’s core consumer is around $40,000 a year. And in a time when other brick-and-mortar retailers are closing stores, Dollar General is among the fastest-growing retailers in America. And the retailer plans to open 1,000 new stores in 2020.

The allure is pretty simple. Rock-bottom prices on snacks and household goods. And according to Dollar General CEO Todd Vasos, that doesn’t appear to be changing. “We see her (DG’s target consumer) about where we have the last couple of quarter,” said Vasos. “She still has a little bit of extra money in her pocket, continues to be employed at a pretty high rate. But, always remember, our core customer is always a little stretched.

Earnings season reveals winners and losers within different sectors

This has clearly been the case in the retail sector. While stores like Target NYSE: TGT and Walmart NYSE: WMT are clearly competing with the e-commerce giant Amazon NASDAQ: AMZN.

 Dollar General is also one of the winners, but for entirely different reasons. By carving out a niche with customers who may not be participating in the e-commerce economy, the discount retailer is thriving. As part of their new launch, the company is hoping that a couple of their strategic investments pay off. The first is the expansion of private label items. One example is DG Fresh, which is allowing the company to distribute fresh and frozen produce directly to its stores. This has been a cause of concern among consumer activists who say that dollar stores squeeze out mom-and-pop grocery chains but do not provide healthy alternatives.

And Dollar General isn’t ignoring technology altogether. They are introducing a Fast Track, self-checkout initiative that will offer customers productivity and convenience benefits.