Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Grocery Wars

Is Dollar General’s Growth Sustainable?

Dollar General (NYSE: DG) just reported another quarter of phenomenal revenue growth. That raises the question: is the company making enough money to sustain; or justify, its ambitious expansion plans?

During the last quarter Dollar General’s revenues grew by $350 million; rising from $20.37 billion in January to $20.72 billion in April. That continued a seemingly endless run of revenue growth, Dollar General’s TTM revenue has grown every quarter since July 2011 according to ycharts.

The company has added $7.25 billion to its revenues during that period. That number justifies Dollar General’s massive expansion efforts, which show no sign of slowing down.

Dollar General’s Reckless Expansion Plans

The discounter opened 730 new stores and remodeled 881 existing locations in 2015. Dollar General’s management hopes to open 900 stores in 2016, and 1,000 in 2017, Retail Dive reported.

That will increase the company’s square footage by 6% to 8%. If that was not ambitious enough, there are plans to remodel 875 Dollar Generals.

The plan will give Dollar General one of America’s largest footprints if it works out. The company currently has 12,400 stores in 43 states, if the expansion is completed it will have 14,300 stores.


The plans include 80 smaller stores in urban markets to compete with Dollar Tree (NASDAQ: DLTR). That is a slight change of direction because historically, Dollar General has built its stores in small towns and rural markets.

Is it Family Dollar all Over Again?

This reckless growth will look very familiar to some investors, because it mirrors the growth of Family Dollar a few years back. Family Dollar expanded dramatically to 7,600 locations, until its revenues suddenly collapsed in 2014. Shortly afterwards the company sold itself to Dollar Tree, and the brand now operates as a subsidiary of that company.

Naturally skeptics will wonder if the same thing can happen at Dollar General. Despite the revenue growth; Dollar General’s same sales only increased by 2.2%, during the first quarter of 2016. That number shows the expansion might not be worth it.

Dollar General seems to have adopted domes of Family Dollar’s failed strategies. Like Dollar General; Family Dollar moved into a number of urban markets such as Denver, shortly before its collapse. Family Dollar was a historically rural company, much like Dollar General.


Is Dollar General Making Money?

More telling results will come when we dissect Dollar General’s financials to see if the expansion is actually paying off.

Dollar General’s net income is growing slightly, it reported a net income of $1.096 billion April 2015; that grew to $1.207 billion in April 2016. The company also some growth in its free cash flow during that period. It reported a free cash flow of $270.28 million in April 2015; that grew to $304.99 million a year later.


Disturbingly, Dollar General’s cash from operations fell slightly over the past year. Dollar General reported $1.433 billion in cash from operations in April 2015; and $1.412 billion in cash from operations a year. That number casts serious doubt on the expansion; the company is less cash even though it opened 730 stores last year.

Dollar General also has very little float it only had $187.69 million in cash and short-term investments on April 30, 2016. That number was actually less than Dollar General had in the bank in April 2015; $225.12 million.

A major reason for the drop in cash might be all the competition in discounting. Dollar General is being forced to lower prices to remain competitive with aggressive discounters like Walmart, Dollar Tree, Amazon, Kroger and Aldi. It has to offer prices so low; that the profit margin is nonexistent, just to remain competitive. That might be why increased revenue is not leading to more cash.

This means Dollar General’s resources are very limited; because its operation margin is thin. All it would take is a sudden drop in sales, or an economic downturn to send this chain spinning off into the death spiral like Family Dollar.

The lack of float, and declining cash casts serious doubt on the 5.6% profit margin and 4.14 earnings per share numbers Dollar General reported on April 30. Even though those numbers look good, they are not translating into additional cash.

Dollar General is not a Value Investment

This means Dollar General is not a value investment, despite its 1.04% dividend yield and 22.42% return on equity. Instead it is a very risky speculative play, because the chain might collapse at any time.

Dollar General is a risk because its management is continuing a reckless expansion that is not paying off in the form of more cash. The company is operating on low cash flow, and the hope that more locations will generate the cash needed to sustain its operations.

My prediction is that Dollar General’s momentum will suddenly stop, and the revenue growth will dramatically reverse. When that happens, expect Dollar General to collapse or contract very quickly like Family Dollar did. Stay away from Dollar General’s stock because this company’s growth and its business model are not sustainable with the current cash flow.