Dollar General Corp. (NYSE: DG) Is Set To Lead Discount Retailers In 2018

January 16, 2018, 09:26 am ET, BY Simon M.- Contributor| Editor: Thomas H. Kee Jr. (Follow on LinkedIn)

Dollar General Corp. (NYSE: DG) is a discount retailer that mainly serves low-income populations in rural areas within 44 states across the US, as of Q3 2017. The retailer has benefitted immensely from the weak economic conditions that have prevailed in many rural areas within the US since the 2008 recession.

Article Summary

Dollar General had a good 2017 as it did not close a single store last year.

The prevailing macroeconomic conditions favor the retailer’s business model.

The retailer plans to expand into more states and urban areas in 2018.

Here’s the trading report on DG.  

Given that the brick-and-mortar retail model has suffered greatly in the past year, it is quite surprising to note that Dollar General did not close even a single store last year. This is a crucial vote of confidence for the retailer given that last year marked a high in retail store closures, which according to data from CNBC, grew by 212% to hit a high of 6,985 closures.

DG’s closest competitor is Dollar Tree, Inc. (NASDAQ: DLTR), which serves an almost similar market demographic, but trades at a P/E ratio of 26.13, while DG is much cheaper with a P/E ratio of 21. Dollar Tree also closed about 74 stores, which implies that it might reached a saturation point with its store locations; this is a key differentiator between the two companies as DG is planning on opening 900 new stores in 2018.

The retailer serves a market demographic that eschews making purchases from e-commerce retailers such as Amazon.com, Inc. (NASDAQ: AMZN) mainly because they are not used to the technology. DG also has a major advantage over big-box retailers such as Wal-Mart Stores Inc (NYSE: WMT), which require more space for their stores, hence, they are not conveniently located close to consumers.  

DG’s business model focuses of offering consumables to its consumers within walking distances of their homes and at a discounted price. This is what makes the retailer’s operating model unique and highly profitable, which is likely to continue into 2018 so long as the tough economic conditions continue to affect consumer shopping trends.

However, DG’s business model might face significant challenges if its target populations achieve higher disposable incomes as they might prefer to shop at big-box stores where there is more variety. This is a risk that is unlikely to materialize in the next few years, but might affect the retailer negatively if it ever materializes.

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