Dollar General is Bigger than Sears

A milestone has been reached in the world of American retail; Dollar General’s (NYSE: DG) sales are greater than those of Sears Holdings (NASDAQ: SHLD).

Dollar General reported revenues of $22.33 billion on April 30, 2017; Sears which includes Kmart, reported revenues of $21.05 billion on the same day. That means DG’s revenues exceeded Sears’ by $1.30 billion at the end of first quarter 2017.

The revenue gap is likely to wide because Sears’ revenues fell by $1.09 billion during first quarter, while Dollar General’s grew by $340 million. Dollar General reported $21.99 billion in revenues on January 31, 2017; a date when Sears reported $22.14 billion.

A bottom-feeding dollar store operator is now larger than one of the most iconic names in American retail. Those who are concerned about income inequality will be distressed by this, Sears the middle class retailer is shrinking; while DG which markets to the poor is growing.

Is Dollar General Making Money?

Cynics will say Dollar General is growing like a weed and it is bigger than Sears, but is it making money? After all Whole Foods Market (NASDAQ: WFM); another somewhat specialized retailer that caters to a particular demographic was growing like a weed until it collapsed and sold itself to Amazon (NASDAQ: AMZN).

There is reason to be concerned about overreach at Dollar General, its income has started to shrink. DG reported $1.251 billion in net income in January 2017 and $1.235 billion in April. Observers will say that’s just the holiday season, noting other retailers; including Walmart (NYSE: WMT), saw their net income shrink in the first quarter of 2017.

Others like Kroger (NYSE: KR) took an even bigger income hit than Dollar General did. Kroger’s income fell by $377 million dropping from $1.96 billion to $1.583 billion in February, March and April of 2017. Walmart’s net income also dropped slightly in that period going from $13.64 to $13.60 billion.

Dollar General’s Cash has improved

Dollar General is making less money but its’ cash situation is a little better. The dollar store operator reported $326.23 million in free cash flow in January and $366.94 million April.

Cash from operations was far better; Dollar General reported $1.605 billion in cash from operations in January and $1.712 billion in April. Cash from operations improved dramatically over the past year, in April 2016 Dollar General reported $1.425 billion in cash from operations a number that grew to $1.712 billion a year later. That made for an increase of $287 million which will certainly attract the interest of value investors.

The same investors will ask if Dollar General has float; well it reported $205.98 million in cash and short-term investments and assets of $11.80 billion on April 30, 2017. Like a lot of retailers, Dollar General generates a lot of cash but very little float.

Why Dollar General might Collapse

The limited amount of float should concern shareholders because it shows how and why retailers like Dollar General can quickly collapse. They can actually be expanding and seeing their cash from operations increase when they suddenly run short of money and cannot cover expenses.

That’s what happened at Whole Foods; the rug was pulled out from it by falling food prices, and increased competition from Kroger. A combination of food deflation and Kroger’s ability to offer the same stuff as Whole Foods; precooked meals and organic vegetables, at lower prices caused a fall in sales.

DG investors should take a close look at Whole Foods because it too is a retailer with a specialized business model that caters to a particular demographic. Dollar General sells to mostly rural working class people at low prices, Whole Foods sold to upper class urban dwellers at higher prices.

Like Whole Foods; Dollar General is facing intense competition from Dollar Tree (NASDAQ: DLTR), Aldi, Kroger, Walmart, Costco Wholesale (NASDAQ: COST) and a host of others. It has been able to stave that off by sticking to the niche of rural mass discounting, but that might no longer work. There’s some new competition for Dollar General in the form of Amazon.

How a Brick and Mortar Amazon Threatens Dollar General

The nation’s fastest growing mass discounter, Amazon (NASDAQ: AMZN) has figured out how to directly threaten Dollar General. It has done this by opening and buying brick and mortar stores.

One of Dollar General’s few advantages over Amazon was that customers were unable to use cash at the Everything Store. Operating brick and mortar stores enables Amazon to take cash payment for items ordered online. Walmart is already doing that with merchandise ordered through Walmart.com.

This can be a huge problem for traditional retailers like DG because it enables Amazon to tap the 32% of US transactions that are still made in cash. It also makes the online retailer competitive for the more than 50% of purchases under $25 that were made in cash. Note: these numbers reflect data collected in 2015 by the Federal Reserve Bank of San Francisco so they are probably outdated.

Sorry Dollar General, You’re Not Amazon Proof

Amazon is already competing with Dollar General in household supplies and a number of other areas. The online retailer is a direct threat to DG because it offers a more convenient shopping experience.

Much of dollar stores’ appeal is their convenience they are in the neighborhood and easy to get into and out of quick. Amazon is even more convenient; you do not even have to leave the couch to shop there, and the stuff is brought straight to your door.

Buying Whole Foods can make Amazon even more convenient because it will have 460 neighborhood fulfillment centers across the country. Amazon, Deliv, Lyft or Uber drivers operating out of them can fill orders on a same day basis at little extra cost. The situation will be magnified if Amazon starts gobbling up other failing retailers such as Rite Aid (NYSE: RAD) and BJ’s Wholesale Club.

Walmart and Kroger are already doing this; Walmart is experimenting with delivery by Deliv, Uber, Lyft and its own associates. Kroger is testing Uber delivery and branded vans in some markets.

This makes Dollar General highly vulnerable to Amazon and other online retailers. One potential nightmare it faces is being left with nothing but the oldest, poorest and most unsophisticated shoppers. Just the illiterate and senior citizens will be shopping at the dollar store while everybody else is shopping online.

At some point, Dollar General will either see its revenue start to fall or change its business model. A potential solution is to make Dollar General Stores into a pickup point for online merchandise orders. Another is to join forces with an online retailer and use stores as home bases for local delivery.