Store Expansion And Digital Initiatives Will Enhance Efficiency And Customer Experience

Key Takeaways

• Portfolio optimizations and ambitious store expansions are expected to enhance operational efficiency and drive future revenue growth.
  
• Digital initiatives and strategic product mixes aim to boost revenue and improve gross margins through enhanced customer experience and higher-margin items.
  
• Economic pressures, store closures, and higher costs challenge Dollar General's revenue growth and profitability due to declining customer traffic and depressed consumer spending.

Catalysts

A discount retailer, provides various merchandise products in the southern, southwestern, midwestern, and eastern United States.

• Dollar General's portfolio optimization, including the closure of underperforming stores and reallocations, aims to enhance operational efficiency and resource allocation, which is expected to positively impact future net margins.
  
• The ambitious store expansion plan, including 575 new store openings in the U.S. and additional international locations, is anticipated to drive revenue growth through increased market presence.
  
• Shrink mitigation efforts have already shown a significant improvement, offering a promising future tailwind for gross margins throughout 2025 and beyond.
  
• The digital initiative, including partnerships with DoorDash and the rollout of same-day delivery, is designed to attract and retain customers, thereby potentially boosting revenue and enhancing customer experience.
  
• Dollar General's focus on the DG Media Network and optimizing non-consumable categories aims to improve gross margins through high-return advertising initiatives and a strategic product mix shift toward higher-margin items.

Dollar General Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Dollar General's revenue will grow by 4.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.8% today to 3.4% in 3 years time.
• Analysts expect earnings to reach $1.5 billion (and earnings per share of $7.11) by about March 2028, up from $1.1 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $1.9 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.1x on those 2028 earnings, down from 15.9x today. This future PE is lower than the current PE for the US Consumer Retailing industry at 24.3x.
• Analysts expect the number of shares outstanding to grow by 0.12% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.38%, as per the Simply Wall St company report.

Dollar General Future Earnings Per Share Growth

Risks

• Decline in customer traffic by 1.1% in the fourth quarter, impacted by financial pressures on core consumers, could suggest potential challenges in maintaining or growing revenue.
  
• The decision to close 96 Dollar General stores, especially in urban areas where operations have become more challenging, might limit revenue growth potential and could negatively impact future earnings.
  
• Economic pressures on core customers, without anticipated improvement in the macro environment, could depress consumer spending and negatively impact net sales growth.
  
• Increases in markdowns, inventory damages, and distribution costs, coupled with a greater proportion of sales from the lower-margin consumables category, are negatively affecting profit margins.
  
• Headwinds from wage rate inflation and increased SG&A expenses could pressure operating margins, impacting the profitability of Dollar General in the near term.

Valuation

• The analysts have a consensus price target of $85.941 for Dollar General based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $115.0, and the most bearish reporting a price target of just $69.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $45.9 billion, earnings will come to $1.5 billion, and it would be trading on a PE ratio of 15.1x, assuming you use a discount rate of 7.4%.
  
• Given the current share price of $81.41, the analyst price target of $85.94 is 5.3% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.