The Ratings Game: Dollar General sees opportunity to grow in food deserts

Produce is a growing area for Dollar General Corp., with the discount retailer seeing opportunities for growth in food deserts, places where fresh foods and grocery stores are scarce.

Currently, about 425 Dollar General DG, +0.32%   stores carry produce, according to Todd Vasos, chief executive of the company.

Through the end of the third quarter, 925 Dollar General stores were remodeled, 325 in the Dollar General Traditional Plus format, which includes more cooler cabinets.

In 2019, the company is planning 1,000 store remodels, with produce planned for about 200 of those stores.

Dollar General has 15,227 stores, according to its most recent earnings release.

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“So having those opportunities to put stores, for instance, with a produce selection in areas that are more food deserts in the United States, both in the rural communities and by the way in more metro settings, we find that we can drive a tremendous amount of traffic that way,” Vasos said on the earnings call, according to a FactSet transcript.

“Same thing with our cooler expansion, that we’ve been very, very open about over the last many years.”

Dollar General reported third-quarter same-store sales growth of 2.8%, which the company said was led by consumables, a category that largely includes food. Margins, which declined 39 basis points to 29.5%, took a hit in part because of the shift to consumable items.

“While there are likely to be some questions about its margin, we believe Dollar General’s convenience to urban and rural shoppers should help it to continues to take share going forward,” wrote UBS analysts, who rate Dollar General stock buy with a $120 price target.

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GlobalData Retail is impressed with the ways in which Dollar General is growing its share of wallet from core shoppers, who are spending more thanks to an increase in discretionary income, and noncore shoppers.

“These are typically middle-income consumers who do not primarily visit Dollar General out of economic necessity,” Neil Saunders, managing director of GlobalData Retail writes. “Rather, their trips are driven by a desire for convenience and, sometimes, the love of finding a bargain.”

GlobalData also thinks the retailer is benefiting from store investments, such as the remodels.

“From our data, more people say they will visit Dollar General over the holiday period than last year, which is a sign of both higher store numbers and the chain’s increased appeal,” Saunders said.

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Raymond James analysts also take note of the store remodels and the new stores, which analysts say are “a key growth pillar.”

Raymond James is bullish on the retailer, rating it a strong buy, though analysts cut the price target to $118 from $122 after Dollar General cut its guidance. John Garratt, the company’s chief financial officer, said in a statement that the lower guidance is due to hurricanes in the third quarter and larger-than-expected expenses in the second half of the year.

The company now expects fiscal year net sales growth of 9% compared with previous guidance of 9% to 9.3% growth. EPS is expected to be $5.85 to $6.05, versus previous guidance of $5.95 to $6.15. And same-store sales growth is expected to be in the middle of the mid-to-high 2% growth that was previously forecast.

“We see Dollar General as one of the most attractive ‘all weather’ investments in hard-line retail as the company can deliver 8% to 9% annual revenue growth while maintaining the defensive characteristics of a consumer staple (85% of total revenue),” Raymond James wrote.

Dollar General shares have rallied 12.6% for the year-to-date, outpacing the S&P 500 index SPX, -1.70% , which is down nearly 1% for the period.

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