A couple of weeks ago, I recommended buying Dollar General(NYSE: DG) prior to Thursday's release of its fourth-quarter results. Like Target(NYSE: TGT), Walmart(NYSE: WMT), and Family Dollar parent Dollar Tree(NASDAQ: DLTR) already had, I expected Dollar General to exceed analysts' Q4 earnings estimates, as well as show progress in paring back its bloated inventory levels.
I was wrong ... sort of. For the three-month stretch ending in early February, Dollar General turned $10.2 billion worth of sales into a per-share profit of $2.96. Both numbers topped some analysts' estimates while falling short of others. Although all of these numbers were in the ballpark, so to speak, it was anything but the clear earnings beat I was hoping for.
Nevertheless, I'm doubling down on my bullish stance. Last quarter showed me something else even more impressive about Dollar General than an earnings beat.
My bullish case for Dollar General
As a refresher, my thesis in early March was fourfold. In addition to a probable earnings beat, an improving inventory situation, and its savvy growth initiatives, I highlighted how weak economic environments like the one we're in right now actually play right into Dollar General's hand.
The discount retailer didn't firmly beat top- and bottom-line expectations. Still, year-over-year sales growth of nearly 17.9% is admirable, as is the earnings increase from the year-ago result of $2.57 per share. Same-store sales growth of 5.7% isn't too shabby, either.
The truly impressive aspect of Dollar General's fourth quarter of fiscal 2022, however, is how cost-effectively it got rid of unwanted inventory that's just taking up space and tying up money.
See for yourself. Although still relatively high, just like Dollar Tree, Walmart, and Target did following last year's merchandise swell, Dollar General took a big bite out of its inventory last quarter. As CFO John Garrett pointed out during Thursday's conference call, "Our Q4 inventory growth rate per store was essentially half of what it was in Q3." It's certainly a step in the right direction.
That's not the best part of the inventory story, however. Dollar General didn't have to deeply discount a mountain of merchandise to get it out the door. Last quarter's gross profit margin held above 30%, as had been the case for the discounter even before the COVID-19 pandemic took shape.
For perspective, Target's fourth-quarter gross profit margin fell from 26.5% a year earlier to 23.7% this time around, while Walmart's slipped to 23.5%.
Dollar General does it right
The implication is simple enough. Namely, although no part of its Q4 press release or its official quarterly filing with the Securities and Exchange Commission offers any specifics on the matter, the retailer is clearly somehow selling more of its aging goods at full price. At the very least, it's not being forced to sell many goods at a rock-bottom price. Indeed, given that most its rivals were forced to lower prices dramatically last quarter, it's not a stretch to say Dollar General has a surprisingly strong grasp on its merchandising, right down to the individual store level -- a premise supported by management's commentary during Thursday's earnings call.
And that matters in this business, perhaps more than it does for any other industry.
See, retailing's net profit margins are typically in the single digits. That's practically paper-thin, leaving no room for error. Dollar General's net income margin for Q4 was just under 6.5%, for perspective.
The thing is, that's still a much better net profitability margin than Walmart, Target, and Dollar Tree were able to muster last quarter. Less than 4% of Walmart's sales were turned into net income in the final quarter of last year. Target's net income margin was below 3%. The biggest factor leading to these numbers, of course, is how much money is left over after paying for the goods sold in any given quarter.
Connect the dots. Clearly, Dollar General's doing something right and doing it better than its top competitors. If the company is doing the pricing and merchandising stuff correctly, it's a good bet it's doing the other, less tangible things right as well.
Much more to like than not like
There are concerns to be sure. Chief among them is the company's guidance for the year now underway.
Weighed down by an anemic economy and high interest rates, Dollar General is looking for companywide sales growth to slow down to a pace between 5.5% and 6% for fiscal 2023, with same-store sales expected to increase only between 3% and 3.5% versus last year. Per-share earnings growth will likely be in the same ballpark, according to the retailer's full-year outlook.
Dollar General's management may be acting unnecessarily conservative about this year's results, though. While operating and inventory costs are still relatively high, they're cooling. Also bear in mind this value-oriented retailer is able to perform well in all economic environments, but is built to thrive in so-so economic conditions like we're experiencing now.
Bottom line? Nothing's really changed much since early March, including the stock's price following Thursday's tumble. Look at that lack of forward progress since then as a gift, though. I think the market's going to see the light on this stock sooner or later, and probably sooner than later.
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James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Target and Walmart. The Motley Fool has a disclosure policy.