Dollar General (NYSE: DG) is one of the largest discount retailers in the United States by number of stores. Across the United States, it has 18,190 stores, most of them located in the southern and eastern parts of the nation. Dollar General sells a broad selection of merchandise, ranging from consumable items to apparel to seasonal items, at everyday low prices – typically under $10 per item. Strong leadership and planning, especially under current CEO Todd Vasos, has resulted in 31 consecutive years of positive same-store sales growth between 1990 and 2020.
Contents
Listen to this article
Is Dollar General Franchised?
Dollar General’s large domestic presence and history of profitable growth has prompted questions about whether or not investors can own and operate a Dollar General franchise. Unfortunately, Dollar General stores are not available for franchising. All of their units are company-owned and operated, meaning that profits stay within the company and do not go to outside operators.
We estimate that the Dollar General franchise cost would be $1,000,000 to $2,000,000+.
Nevertheless, prospective franchisees who intend to explore franchising opportunities in the discount consumer goods market should assess comparable businesses in the industry, such as Dollar General. This article will analyze Dollar General’s annual report, the 10K, for 2021, and examine the financial health and viability of the Dollar General business, including potential investment catalysts, risk factors, and their outlook on the future.
Basic Company Overview
Founded in 1939 in Kentucky, Dollar General has expanded across the United States with a simple business model: providing customers with their everyday needs at low prices in convenient, small-box stores.
Dollar General offers basic merchandise with the idea that customers can address most of their shopping needs in one trip. To this end, the company offers four types of goods:
- Consumables are the largest category and include cleaning products, packaged foods, snacks, and health products;
- Seasonal products include holiday items, toys, cards, phone accessories, gardening, and home office supplies;
- Home products include kitchen supplies and small appliances; and
- Apparel includes basic apparel for a wide demographic of individuals.
You can see the percentage of net sales over the past three years below.
Net Sales
| 2021 | 2020 | 2019 | |
|---|---|---|---|
| Consumables | 76.7 % | 76.8 % | 78.0 % |
| Seasonal | 12.2 % | 12.1 % | 11.7 % |
| Home products | 6.8 % | 6.5 % | 5.8 % |
| Apparel | 4.3 % | 4.6 % | 4.5 % |
Dollar General stores form the backbone of the company. Many are small stores in small towns, – the average building consists of 7400 sq ft of selling space, and 75% of stores are located in towns with less than 20,000 people. Stores have low operating costs and limited maintenance capital, driving operating costs down. Dollar General has also experienced net growth in the total number of stores operated, which is a reflection of the company’s success in locating suitable markets.
Units Opened & Closed
| Year | Stores at Beginning of Year | Stores Opened | Stores Closed | Net Store Increase | Stores at End of Year |
|---|---|---|---|---|---|
| 2019 | 15,370 | 975 | 67 | 908 | 16,278 |
| 2020 | 16,278 | 1,000 | 101 | 899 | 17,177 |
| 2021 | 17,177 | 1,050 | 97 | 953 | 18,130 |
Dollar General operates in the discount consumer goods market, which is a highly mature and competitive market with respect to price, customers, location, quality, and market share. The direct competitors are other small-box discount retailers, namely Family Dollar, Dollar Tree, and 99 Cents Only. Dollar General also indirectly competes with larger mass merchandise retailers such as Walmart, Target, CVS, and Rite-Aid. Executives at Dollar General believe they stand out in this market by consistently offering low prices in a convenient, small-store setting.
There is the possibility to build a Dollar General and lease the space to Dollar General. You could even sell the property to a REIT (real estate investment trust) to recoup your investment faster.
Investment Catalysts
Dollar General’s future outlook is largely based on two ideas: increased store expansion into new and existing markets and the expansion of the pOpshelf store.
Regarding the former, Dollar General currently operated 18,190 retail stores in 47 states, with the largest presence in Texas, Georgia, Ohio, and North Carolina. As mentioned above, Dollar General has seen net growth in the total number of stores operated in the United States.
Additionally, Dollar General has launched pOpshelf as a new store brand in 2020. pOpshelf addresses the emerging consumer trend for a treasure-hunt experience in stores and features flashy, cheap items like toys and home decorations. It currently has 53 stores, with plans to expand to 1,000 stores by 2025. Scaling up to this range is incredibly reasonable for Dollar General given their existing nationwide distribution and store networks.
Risk Factors
There are a couple of major risks associated with investing in Dollar General. Broadly speaking, they can be broken down into business/strategic risks and operational risks.
Business
First, the Covid-19 Pandemic has impacted Dollar General’s financial performance and will continue to do so in the future. The pandemic has brought about supply chain disruptions, capacity constraints, reduced availability of certain products, increased transportation costs, delayed store openings, and temporary store and distribution center closures. While none of these factors have resulted in an adverse impact on the financial business of the company, the uncertainty with regards to how the pandemic will continue to evolve means that these factors may continue to plague Dollar General, as well as the company’s competitors in the discount consumer goods industry.
Additionally, adverse economic factors may reduce consumer spending, which in turn results in decreased sales and profits for Dollar General. Many Dollar General customers have low incomes; factors that could lower their disposable income could shift the demand for Dollar General goods downwards. These factors include high unemployment, inflation, raised interest rates, and high fuel and energy prices. While these factors are incredibly general and impact many consumer goods companies, these factors have been aggravated in recent months due to the impact of COVID-19 on financial markets and the Russian invasion of Ukraine.
Lastly, intense competition is always present in the consumer goods industry and will continue to be so. With many competitors, Dollar General has a limited ability to set prices and must change prices to maintain a competitive advantage, which reduces margins and profitability. Large retailers, such as Walmart and Target, have vastly greater financial and distribution resources. And may attempt to push Dollar General out of the market.
Operational
Dollar General is cognizant of the fact that significant delays in store openings, relocations, and remodelings will impact the financial performance of the company. Store expansion is a key component of the company’s future plan; delays in store expansion, then, will pose a challenge to future growth. Dollar General has not disclosed whether previous store expansions have experienced delays; however, due to the COVID-19 pandemic, it may be implied that the company has experienced issues with this in recent years.
Financial Statements
You can see Dollar General’s three financial statements here (all numbers in thousands)
Balance Sheet
| January 28, 2022 | January 29,2021 | |
|---|---|---|
| ASSETS | ||
| Current assets: | ||
| Cash and cash equivalents | $ 344,829 | $ 1,376,577 |
| Merchandise inventories | 5,614,325 | 5,247,477 |
| Income taxes receivable | 97,394 | 90,760 |
| Prepaid expenses and other current assets | 247,295 | 199,405 |
| Total current assets | 6,303,843 | 6,914,219 |
| Net property and equipment | 4,346,127 | 3,899,997 |
| Operating lease equipment | 10,092,930 | 9,473,330 |
| Goodwill | 4,338,589 | 4,338,589 |
| Other intangible assets, net | 1,199,750 | 1,199,870 |
| Other assets, net | 46,132 | 36,619 |
| Total assets | $ 26,327,371 | $ 25,862,624 |
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||
| Current liabilities: | ||
| Current portion of operating lease liabilities | $ 1,183,559 | $ 1,074,079 |
| Accounts payable | 3,738,604 | 3,614,089 |
| Accrued expenses and other | 1,049,139 | 1,006,552 |
| Income taxes payable | 8,055 | 16,063 |
| Total current liabilities | 5,979,357 | 5,710,783 |
| Long-term obligations | 4,172,068 | 4,130,975 |
| Long-term operating lease liabilities | 8,890,709 | 8,385,388 |
| Deferred income taxes | 825,254 | 710,549 |
| Other liabilities | 197,997 | 263,691 |
| Commitments and contingencies | ||
| Shareholders’ equity: | ||
| Preferred stock | — | — |
| Common stock; $0.875 par value, 1,000,000 shares authorized, 230,016 and 240,785 shares issued and outstanding at January 28,2022 and January 29,2021, respectively | 201,265 | 210,687 |
| Additional paid-in capital | 3,587,914 | 3,446,612 |
| Retained earnings | 2,473,999 | 3,006,102 |
| Accumulated other comprehensive loss | (1,192) | (2,163) |
| Total shareholders’ equity | 6,261,986 | 6,661,238 |
| Total liabilities and shareholders’ equity | $26,327,371 | $25,862,624 |
Income Statement
| January 28, 2022 | January 29,2021 | January 31,2020 | |
|---|---|---|---|
| Net sales | $34,220,449 | $33,746,839 | $27,753,973 |
| Cost of goods sold | 23,407,443 | 23,027,977 | 19,264,912 |
| Gross profit | 10,813,006 | 10,718,862 | 8,489,061 |
| Selling, general and administrative expenses | 7,592,331 | 7,164,097 | 6,186,757 |
| Operating profit | 3,220,675 | 3,554,765 | 2,302,304 |
| Interest expense | 157,526 | 150,385 | 100,574 |
| Income before income taxes | 3,063,149 | 3,404,380 | 2,201,730 |
| Income tax expense | 663,917 | 749,330 | 489,175 |
| Net income | $2,399,232 | $2,655,050 | $1,712,555 |
| Earnings per share: | |||
| Basic | $ 10.24 | $ 10.70 | $ 6.68 |
| Diluted | $ 10.17 | $ 10.62 | $ 6.64 |
| Weighted average shares outstanding: | |||
| Basic | 234,261 | 248,171 | 256,553 |
| Diluted | 235,812 | 250,076 | 258,053 |
| Dividends per share | $ 1.68 | $ 1.44 | $ 1.28 |
Cash Flow Statement
| January 28, 2022 | January 29,2021 | January 31,2020 | |
|---|---|---|---|
| Cash flows from operating activities: | |||
| Net income | $2,399,232 | $2,655,050 | $1,712,555 |
| Adjustments to reconcile net income to net cash from operating activities: | |||
| Depreciation and amortization | 641,316 | 574,237 | 504,804 |
| Deferred income taxes | 114,359 | 34,976 | 55,407 |
| Noncash share-based compensation | 78,178 | 68,609 | 48,589 |
| Other noncash (gains) and losses | 191,040 | 11,570 | 8,293 |
| Change in operating assets and liabilities: | |||
| Merchandise inventories | (550,114) | (575,827) | (578,783) |
| Prepaid expenses and other current assets | (47,471) | (16,516) | (14,453) |
| Accounts payable | 98,735 | 745,596 | 428,627 |
| Accrued expenses and other liabilities | (37,328) | 388,597 | 100,322 |
| Income taxes | (14,642) | (6,522) | (20,404) |
| Other | (7,494) | (3,611) | (6,959) |
| Net cash provided by (used in) operating activities | 2,865,811 | 3,876,159 | 2,237,998 |
| Cash flows from investing activities: | |||
| Purchases of property and equipment | (1,070,460) | (1,027,963) | (784,843) |
| Proceeds from sales of property and equipment | 4,903 | 3,053 | 2,358 |
| Net cash provided by (used in) investing activities | (1,065,557) | (1,024,910) | (782,485) |
| Cash flows from financing activities: | |||
| Issuance of long-term obligations | — | 1,494,315 | — |
| Repayments of long-term obligations | (6,402) | (4,640) | (1,465) |
| Net increase (decrease) in commercial paper outstanding | 54,300 | (425,200) | 58,300 |
| Borrowings under revolving credit facilities | — | 300,000 | — |
| Repayments of borrowings under revolving credit facilities | — | (300,000) | — |
| Costs associated with issuance of debt | (2,268) | (13,574) | (1,675) |
| Repurchases of common stock | (2,549,669) | (2,466,434) | (1,200,376) |
| Payments of cash dividends | (392,188) | (355,926) | (327,568) |
| Other equity and related transactions | 64,225 | 56,467 | 22,104 |
| Net cash provided by (used in) financing activities | (2,832,002) | (1,714,992) | (1,450,680) |
| Net increase (decrease) in cash and cash equivalents | (1,031,748) | 1,136,257 | 4,833 |
| Cash and cash equivalents, beginning of period | 1,376,577 | 240,320 | 235,487 |
| Supplemental cash flow information: | |||
| Cash paid for: | |||
| Interest | $159,803 | $128,211 | $100,033 |
| Income taxes | $568,267 | $721,570 | $457,119 |
| Supplemental noncash investing and financing activities: | |||
| Right of use assets obtained in exchange for new operating lease liabilities | $1,778,564 | $1,721,530 | $1,705,988 |
| Purchases of property and equipment awaiting processing for payment, included in Accounts payable | $143,589 | $118,059 | $110,248 |
Statement
From the income statement, we see that net income has fallen when comparing FY 2021 (year end Jan 2022) to FY 2020 (year end Jan 2021). Digging deeper, we see that while net sales increased in 2021, various costs, including cost of goods sold and general administrative expenses, increased at a disproportionately higher rate, driving down operating profit and net income. The increase in costs over the past year is not unexpected: supply chain shortages due to the pandemic will increase the cost of production, while high levels of inflation will increase the administrative expenses.
Looking at the cash flow statement, we see that the total amount of cash held by Dollar General in 2021 ($344 million) was substantially lower than in 2020 ($1.38 billion), but that 2020 was an abnormally high year when compared to previous years. 2020 saw abnormally high changes in accounts payable and accrued expenses, which can be attributed to the disruption caused by the pandemic. Nevertheless, cash holdings in 2021 increased when compared to pre-Covid years, implying that Dollar General is still in a healthy financial position.
Conclusion
Dollar General is a solid, profitable company in the discount consumer goods industry. They experienced unprecedented growth during the early stages of the pandemic, and while that growth has mostly tapered off, Dollar General remains a profitable business.
Although Dollar General does not offer franchises, there are plenty of other consumer goods companies that you can explore on the Vetted Biz website.
