Is Dollar General Undervalued by 25%?

Here we will discuss why I have been buying Dollar General at around what I believe is 25-30% under the intrinsic value of the business.

Asset Value of the Equity Valuation

Am I contemplating Dollar General as an investment option?

When evaluating the equity's asset value, I would advise against it being a favorable choice.

Through assessing the Asset Value of the Equity, we aim to comprehend the company's assets, debts, and offset them against each other. Unlike the balance sheet, we also re-evaluate some assets and liabilities to determine their true economic worth.

In the case of Dollar General, it's apparent that the market does not value the company based on its assets.

The share price reflects a value for the company well above the equity's asset value.

Even after considering intangible assets like the brand and workforce, the market capitalization of Dollar General today remains significantly higher than our calculations.

For Dollar General, we are better off tying to understand the value of the business by looking at the future earning prospects.

I am not looking to project future earnings, but just consider the latest NOPAT figures, and discounting them through time to find what the business will produce in terms of cash flow over the lifetime of the company.

Now based on the latest accounts, I work this out to have an intrinsic value of around $172 per share.

It used to be higher a couple of years ago, but as the cost of borrowing has gone up, the debt position of dollar general has made it vulnerable to increasing costs, and the share price has dived with the valuation.

However, looking at the current NOPAT, it could be that the business has been oversold.

Despite the increasing cost of capital, if I discount the current sustainable Net operating profit after tax over the life time of the company, I reach and Earnings power value of 56.1 bn over the last financial year.

I adjust for cash and debt to give me an earnings power value of the equity of 38.9 Bn dollars.

Divide that by the shares outstanding, and that’s how I get to 172 dollar per share.

Yes the debt makes it a risk, but dollar general has diligently invested its capital over the years, and I am betting on the rates staying stable or reducing in the next 2 years.

This is where I believe my returns will come from with dollar general.

Company Background

Dollar General is an American chain of discount stores headquartered in Goodlettsville, Tennessee. Here are some key points about the company:

1. Mission and Values:
• Dollar General’s mission is “Serving Others.” They aim to make shopping hassle-free and affordable for their customers.
• They operate more than 19,000 convenient, easy-to-shop stores across 48 states in the U.S.
• Dollar General focuses on delivering value and convenience through their neighborhood general stores.
2. Product Assortment:
• Dollar General sells a wide range of products, including:
• Food and snacks
• Health and beauty aids
• Cleaning supplies
• Basic apparel
• Housewares
• Seasonal items
• Paper products
• And more!
3. Brands:
• They offer products from trusted brands such as Clorox, Energizer, Procter & Gamble, Hanes, Coca-Cola, Mars, Unilever, Nestlé, Kimberly-Clark, Kellogg’s, General Mills, and PepsiCo.
• Additionally, Dollar General carries high-quality private brands that provide customers with options at substantial discounts compared to national brands.
4. Store Model:
• Dollar General designs small, neighborhood stores with carefully curated merchandise assortments.
• Their focus is on household essentials, including paper and cleaning products, food, over-the-counter medicines, health and beauty products, baby needs, and more¹.

In summary, Dollar General stands for convenience, quality brands, and low prices. Their stores aim to make shopping a hassle-free experience for customers by offering a well-edited selection of essential items in neighborhood locations.

 PEST Analysis 

Let’s delve into a PEST analysis for Dollar General, examining the external factors that could impact the company:

1. Political Factors:
• Government Regulations: Dollar General operates in a highly regulated industry. Changes in policies related to retail operations, labor practices, and taxation can significantly affect the company.
• Trade Policies: International trade policies and tariffs may impact the cost of goods and supply chain logistics.
2. Economic Factors:
• Consumer Spending: Dollar General’s performance is closely tied to consumer spending patterns. Economic downturns may lead to reduced discretionary spending, affecting sales.
• Inflation and Currency Fluctuations: These can impact the cost of goods, transportation, and overall profitability.
3. Socio-Cultural Factors:
• Demographics: Understanding the demographics of Dollar General’s customer base is crucial. Catering to diverse age groups, income levels, and lifestyles is essential.
• Health and Wellness Trends: As consumers become more health-conscious, Dollar General may need to adapt its product offerings.
4. Technological Factors:
• E-Commerce and Digital Transformation: The rise of online shopping and digital platforms impacts traditional retail. Dollar General must stay competitive by embracing technology.
• Supply Chain Efficiency: Leveraging technology for inventory management, logistics, and distribution can enhance efficiency.
5. Environmental Factors:
• Sustainability: Consumers increasingly favor environmentally friendly practices. Dollar General’s commitment to sustainability can influence its reputation.
• Energy Efficiency and Waste Management: Implementing eco-friendly practices can reduce costs and enhance brand image.
6. Legal Factors:
• Labor Laws: Compliance with labor laws, employee rights, and workplace safety is critical.
• Litigation and Regulatory Compliance: Legal challenges can impact operations and financial stability.

In summary, Dollar General’s competitive advantage lies in its conveniently located stores, quality brands, wide range of general commodities, and low prices

 Porters Five Forces

Let’s analyze Dollar General Corporation using Porter’s Five Forces framework to understand its competitive environment:

1. Bargaining Power of Suppliers:
• Supplier Concentration: The retail industry has numerous suppliers, resulting in low supplier concentration for Dollar General. The company sources from a diverse group of suppliers, reducing dependency on any single one.
• Switching Costs: Dollar General can easily switch between suppliers based on cost or quality, giving it an advantage in negotiations.
• Forward Integration: While some suppliers may become competitors by selling directly to consumers, Dollar General’s suppliers are primarily manufacturers not competing with the company.
• Importance of Volume to Supplier: As a large retailer, Dollar General significantly impacts its suppliers’ revenue. This motivates suppliers to offer competitive prices and high-quality products¹.
2. Threat of Substitutes:
• Dollar General’s suppliers provide unique products that are difficult to imitate. This reduces the threat of substitutes and strengthens supplier bargaining power.
3. Bargaining Power of Buyers (Customers):
• Dollar General serves a broad customer base. While individual buyers have limited power, collectively, they influence the company’s success.
• Price sensitivity and the availability of alternative stores impact buyer bargaining power.
4. Threat of New Entrants:
• The retail industry has moderate barriers to entry. However, Dollar General’s extensive store network, brand recognition, and economies of scale act as barriers.
• New entrants face challenges in replicating Dollar General’s convenience and cost advantages.
5. Intensity of Rivalry Among Existing Players:
• Dollar General competes with other discount retailers, grocery stores, and online platforms.
• Rivalry is high due to price competition, store location battles, and efforts to attract and retain customers.

In summary, Dollar General’s ability to manage supplier relationships, its unique product offerings, and its strong market position contribute to its success in the competitive retail industry

Segment & Competition

• Walmart:
• Strengths:
• Market Dominance: Walmart is the largest retailer globally, with a massive store network and extensive resources.
• Diverse Product Range: Walmart offers a wide variety of products, from groceries to electronics.
• Economies of Scale: Their size allows them to negotiate better deals with suppliers.
• Weaknesses:
• Bureaucracy: Walmart’s large organizational structure can slow decision-making.
• Labor Issues: The company has faced criticism regarding employee wages and working conditions.
• Family Dollar:
• Strengths:
• Convenience: Family Dollar’s small-format stores are conveniently located in neighborhoods.
• Affordability: They focus on low-priced essentials.
• Loyal Customer Base: Many customers rely on Family Dollar for everyday needs.
• Weaknesses:
• Limited Product Variety: Their selection is narrower compared to larger retailers.
• Store Experience: Some stores may lack cleanliness and organization.

• Dollar Tree:
• Strengths:
• Fixed Price Point: Everything is priced at $1, attracting budget-conscious shoppers.
• Variety: Dollar Tree offers a mix of household items, party supplies, and more.
• Consistent Branding: Their pricing strategy is straightforward.
• Weaknesses:
• Quality Concerns: Some products may be lower quality due to the fixed price point.
• Limited Upselling: The $1 price cap restricts upselling opportunities.
• Aldi:
• Strengths:
• Efficiency: Aldi’s no-frills approach keeps costs low.
• Private Label Brands: They focus on their own brands, reducing reliance on external suppliers.
• Discounted Groceries: Aldi offers groceries at competitive prices.
• Weaknesses:
• Limited Selection: Their stores are smaller, with fewer options.
• Minimal Advertising: Aldi relies less on marketing campaigns.
• Dollar Stores and Convenience Stores:
• Strengths:
• Local Presence: These stores are often conveniently located.
• Quick Shopping: Customers can grab essentials without spending much time.
• Affordability: Prices are competitive.
• Weaknesses:
• Limited Assortment: They may not carry specialized or high-end products.
• Space Constraints: Smaller stores limit the range of offerings.

In summary, Dollar General competes in a crowded market with various strengths, including its extensive store network and strong brand.

Value Chain

Let’s explore the value chain for Dollar General. The company’s business model and supply chain play crucial roles in its success:

1. Inbound Logistics:
• Supplier Relationships: Dollar General collaborates with suppliers to source a wide range of products, including consumables (food, cleaning products) and non-consumables (seasonal merchandise, home decor).
• Distribution Centers: Goods are transported to Dollar General’s distribution centers, strategically located for efficient supply chain management.
2. Operations:
• Store Operations: Dollar General’s small-box stores are conveniently located in neighborhoods. They focus on providing essential items at everyday low prices.
• Inventory Management: Effective category management ensures optimal stock levels and minimizes stockouts.
• Private Brands: Dollar General offers its own private brand selections alongside national brands.
3. Outbound Logistics:
• Store-to-Store Transfers: Dollar General optimizes inventory by transferring excess stock between stores.
• Last-Mile Delivery: Products are delivered from distribution centers to individual stores.
4. Marketing and Sales:
• Value Proposition: Dollar General’s value proposition lies in offering a broad selection of products at affordable prices.
• Local Marketing: They tailor marketing efforts to specific communities.
• Customer Loyalty: Dollar General builds loyalty through consistent low prices and convenient locations.
5. Service:
• Customer Service: Stores provide assistance to customers, ensuring a positive shopping experience.
• Returns and Refunds: Dollar General handles returns efficiently.
6. Support Activities:
• Procurement: Dollar General negotiates with suppliers to maintain competitive pricing.
• Technology and Information Systems: Efficient systems track inventory, sales, and customer preferences.
• Human Resources: Dollar General invests in diverse teams, development, and empowerment.

In summary, Dollar General’s value chain focuses on convenience, affordability, and efficient operations to meet the needs of value-conscious customers. Their commitment to everyday low prices and strategic supply chain management has contributed to their substantial growth and success