Thursday, March 12, 2020

Will Dollar General Shares Continue to Outperform?

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What’s happening: Dollar General is scheduled to report its fourth-quarter results before the opening bell on Thursday, March 12.

What happened: Dollar General’s stock has been among the best performers so far this week, even as the S&P 500 index to which it belongs is in the red on fear of the US slipping into recession due to the spread of coronavirus.

Dollar General had lifted its fiscal year guidance in December after reporting strong third-quarter results. With the discount retailer reporting robust growth in all the previous quarters of fiscal 2019, expectations are for upbeat results this time around too. In fact, consensus estimates for the Goodlettsville, Tennessee-based company have been raised upwards over the last three months.

Analysts covering the retail segments believe Dollar General is the least vulnerable to a slowdown in the US economy.

  • The consensus revenue estimate stands at $7.15 billion, representing 7.5% year-over-year growth.
  • The estimate for earnings is $2.02 per share, up from $1.84 per share reported for the same quarter in the previous year.

Why it matters: Dollar General is among the few stocks in the S&P 500 that are in positive territory so far this week. The discount retailer enjoys a stronger position amid the coronavirus scare, with customers buying products in bulk to prepare for a lockdown. Driving traffic is not the challenge now. Instead, it’s maintaining high inventories and a steady flow of suppliers to meet the increased demand.

Dollar General had already taken initiatives to reduce its dependence on China after being hurt by the US-China trade war. This works to the company’s benefit, as other retailers face supply disruptions due to the coronavirus-related lockdown in China.

If the US economy does go into recession, dollar stores will perform better, as consumers switch from higher-priced products to lower-priced alternatives.

The company’s DG Fresh initiative, which involves self-distribution of its frozen products, is helping to increase sales and margins. Dollar General’s quick technology adoption is working well to improve the customer’s shopping experience. The retailer has also been working on its Fast Track initiative, aimed at boosting labor productivity and on-shelf availability of products. Dollar General’s focus on its private brands has also been driving sales.

The discount chain has plans to expand its store network, with stores in 1,000 new areas and 1,500 remodel stores. Dollar General’s archrival Dollar Tree is also trying to expand its presence but has been struggling to integrate the Family Dollar chain that it had purchased some years back.

Dollar General provided attractive shareholder returns by hiking its quarterly dividend by 10% last year and repurchasing 5.6 million shares in the first nine months of fiscal 2019. The company’s board has approved another $1 billion in share buybacks.

How the shares have performed so far: Investor sentiment has been positive for Dollar General so far this year. The stock is up 6.6% year to date, versus a 6.4% decline in Dollar Tree’s stock. Shares of Dollar General gained a whopping 44% in 2019, easily outperforming the 29% rise in the S&P 500.

What to watch: Investors have so far overlooked the fact that Dollar General’s growth slowed in the third quarter. There could be some pressure on the company’s shares due to profit taking and in case the four-quarter print misses expectations. The market will also watch the S&P 500, where Dollar General is a major constituent and will focus on the company’s fiscal 2020 outlook, which could show some negative impact of coronavirus.

The Markets Today

     

Investors will be watching European indices today, with the markets closing lower after a volatile session and the WHO declaring the coronavirus outbreak a pandemic.

Context: European stocks closed lower on Wednesday after recording strong gains earlier in the session. The Bank of England (BoE) announced an emergency rate cut yesterday to provide a boost to the economy.

Details: The WHO has finally termed COVID-19 as a pandemic, given how rapidly the virus is spreading across the world. WHO chief Tedros Adhanom Ghebreyesus said, “We have rung the alarm bell loud and clear.”

On Wednesday, the BoE cut its interest rate from 0.75% to 0.25% and announced various measures to support small- and medium-sized businesses. The newly appointed Finance Minister Rishi Sunak also announced fiscal stimulus measures worth about £30 billion.

After recording gains of more than 2% earlier in the day, the pan-European Stoxx 600 index closed 0.7% lower on Wednesday. Travel-related stocks plunged 4%, while shares of banking and chemicals companies bucked the trend, rising by 1%.

Coronavirus is spreading rapidly in the European nations, with confirmed cases in Italy surpassing 12,000. Germany has also confirmed around 2,000 cases, while the count exceeded 2,200 for France. In total, there are over 126,000 confirmed cases globally, with more than 4,600 deaths. US President Donald Trump announced restrictions of passenger travel from European nations to the US for a month starting late Friday.

In corporate news, shares of Adidas tumbled 9% on Wednesday after the company said it expects a €1 billion decline in sales in greater China in the first quarter. Shares of G4S plummeted 29% after the company reported an annual loss. K+S bucked the trend to trade around 10% higher, despite reporting weaker-than-expected core profits for the latest quarter.

What to watch: Following the downbeat performance in the earlier session, all eyes are on the ECB’s (European Central Bank) interest rate decision, scheduled to be announced today. ECB President Christine Lagarde will be under tremendous pressure to take strong actions, given the lockdown in Italy and signs of the virus spreading in France, Germany and other European nations. Investors also await Eurozone’s industrial production data. Eurozone’s industrial production, which fell 2.1% in December, is expected to rise 1.4% in January.

Other Markets: Most European indices closed lower on Wednesday, with the UK 100, German 30 and French 40 down 1.4%, 0.35% and 0.57%, respectively.

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What else to watch today

     

South Africa’s gold and manufacturing production, Indonesia’s residential property price index, India's industrial production and consumer price inflation as well as the US initial jobless claims, producer prices and changes in natural gas stockpiles.