Optimized Store Portfolio And POpshelf Expansion Will Drive Efficiency

Key Takeaways

• Portfolio optimization and store closures aim to enhance net margins by focusing on profitable operations, improving resource allocation.
  
• Expanding pOpshelf and digital initiatives are expected to drive sales growth, enhancing revenue, customer engagement, and operating efficiency.
  
• Economic pressures and increased costs strain Dollar General's margins, while non-consumable sales declines and urban store closures threaten future profitability.

Catalysts

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

• Dollar General's portfolio optimization by closing underperforming stores is expected to reallocate resources effectively, leading to improved net margins as the company focuses on profitable operations.
  
• The pOpshelf initiative's expansion, with a focus on new brand partnerships, enhanced in-store experiences, and revised store layouts, is anticipated to drive sales growth, potentially increasing overall revenue and contributing to earnings growth.
  
• The comprehensive inventory and SKU optimization strategy aims to improve in-stock levels while reducing shrink and damages, positively impacting gross margins and operating efficiency.
  
• Digital initiatives, such as expanding delivery options and leveraging the DG Media Network, are expected to boost customer engagement and increase sales, driving both top-line growth and higher-margin revenue streams.
  
• Project Elevate and enhanced remodel programs aim to restructure mature stores, projected to yield significant comp sales lifts and operating margin improvements by efficiently utilizing capital and boosting customer traffic.

Dollar General Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Dollar General compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Dollar General's revenue will grow by 4.8% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 2.8% today to 3.5% in 3 years time.
• The bullish analysts expect earnings to reach $1.7 billion (and earnings per share of $7.68) by about April 2028, up from $1.1 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 16.8x on those 2028 earnings, down from 17.3x today. This future PE is lower than the current PE for the US Consumer Retailing industry at 24.0x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.64%, as per the Simply Wall St company report.

Dollar General Future Earnings Per Share Growth

Risks

• Store closures of 96 Dollar General and 45 pOpshelf locations indicate challenges in urban areas, potentially impacting future revenue streams.
  
• A decrease in customer traffic by 1.1% indicates ongoing financial pressures on core consumers, which could further impact revenue.
  
• The necessity to increase retail labor and technology expenses, alongside other operational costs, places pressure on net margins.
  
• Same-store sales growth is primarily driven by consumables, with non-consumable categories experiencing declines, potentially affecting overall earnings due to lower-margin sales mix.
  
• Ongoing economic pressures and anticipated continued inflation for core customers suggest a strained financial environment, which could adversely impact future profitability and earnings.

Valuation

• The assumed bullish price target for Dollar General is $101.02, which represents one standard deviation above the consensus price target of $89.59. This valuation is based on what can be assumed as the expectations of Dollar General's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• 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 $75.0.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $46.7 billion, earnings will come to $1.7 billion, and it would be trading on a PE ratio of 16.8x, assuming you use a discount rate of 7.6%.
• Given the current share price of $88.43, the bullish analyst price target of $101.02 is 12.5% higher.
• 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.