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© Reuters. Dollar General Stock: good for low risk investors
Dollar General (NYSE 🙂 profited from the COVID-19 pandemic, particularly in 2020, as it remained a vital business that remained open while other businesses closed.
This led to a 21.6% increase in revenue from January 2020 to January 2021. Now that the pandemic is mostly behind us, DG is expected to experience slightly negative profit growth and low single-digit revenue growth for 2022, before returning to a high level. growth in numbers.
We are neutral on Dollar General. (See Dollar General stock charts on TipRanks)
Growth catalysts
Dollar General operates in the retail sector, which is expected to grow at a CAGR of 4.5% from 2021 to 2026.
E-commerce is the fastest growing segment of retail and Dollar General is not known for its presence in e-commerce. While not heavy on e-commerce, Dollar General has still managed to grow steadily over the years with its strategy of opening new stores in rural areas where there are no. not a lot of competition. For 2021, Dollar General is in the process of opening 1,035 points of sale, while closing only 18.
The company is also venturing into the health sector by offering more health products on its shelves and plans to offer health services.
CEO Todd Vasos said the reason for the move to healthcare is because about 65% of the company’s stores are located in ‘health deserts’, where people have to browse. long distances to access basic medical care.
This strategy makes sense and should help DG fuel future growth. The company recently hired a chief medical officer, saying it takes the decision seriously.
Measure efficiency
Retailers like Dollar General must hold multi-billion dollar inventory in order to keep the business going. Therefore, the speed at which a business can move its inventory and convert it to cash is very important in predicting success. To measure the effectiveness of DG we will use the convert to cash cycle which shows how many days it takes to convert inventory to cash. It is calculated as follows:
CCC = Days of outstanding stock + Days of sales outstanding – Days of accounts payable
Dollar Generals’ cash conversion cycle is 23 days, which means it takes 23 days for the business to convert inventory to cash. That’s better than its closest competitors, Five Below (NASDAQ 🙂 and Dollar Tree (NASDAQ :), at 39 and 40 days, respectively.
DG’s gross profit margins are 32.1%. This figure is better than Dollar Tree’s 30.8% margins, but worse than Five Below’s 35.8%. One important thing to note is that before COVID-19 gave DG a boost, its gross margin and EBIT margins were on a slow but steady downtrend, indicating that the competition may be slowly cutting corners on DG.
The Taking of Wall Street
According to the TipRanks analyst rating consensus, Dollar General has a strong buy rating, based on 10 unanimous buys awarded in the past three months. The overall dollar average price target of $ 253.78 implies upside potential of 15%.
Final thoughts
While Dollar General is an excellent recession-proof company that should perform well over the long term, we are currently neutral due to its weak growth, relatively low returns on capital, and slowly declining margins.
Disclosure: At the time of publication, Stock Bros Research does not have a position in any of the titles mentioned in this article.
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