Dollar General Is Still One Of The Best Retail Growth Stories

Dollar General Corp. (NYSE: DG) reported robust 1Q16 results. The stock has appreciated 23 percent year-to-date. MKM Partners’ Patrick McKeever maintained a Buy rating on the company, while raising the price target from $91 to $97.

Solid Results

“Comps were slightly above our estimate, driven by continued growth in traffic and ticket and meaningful market-share gains, while EPS were well above,” McKeever mentioned.

Although a lower-than-anticipated tax rate added $0.03 to the EPS, the analyst stated that it still was a “high-quality beat,” driven by the largest margin expansion the company has seen since 3Q12.

Related Link: Goldman Praises Dollar General's Consistent Top Line, Cost Control

The McKeever pointed that this was the 33rd consecutive quarter of ticket and traffic growth for Dollar General, with same-store sales rising 2.2 percent and consumables sales being the strongest.

The analyst believes higher margin categories also doing well during the quarter “speaks to an improving economic backdrop for the core dollar store customer and also validates non-consumable merchandise initiatives.”

Same-Store Sales Growth

McKeever believes that with new stores slated to open to 80-85 percent productivity, it could add 150-200 bps to the company’s same store sales growth, and then mature over the next few years.

“The pattern has been very consistent and highly predictable in recent years, driven in part by DG's increasingly sophisticated real estate models,” the analyst noted.

Sustained growth in non-consumable merchandise is also expected to drive same-store sales growth, as Dollar General further leverages its “best-in-class category management process and expands assortment in areas like party and stationery, where wallet share remains very small,” McKeever added.