Dollar General Corp. (NYSE:DG) is the largest deep-discount retailer in the country. But the changing landscape of small neighborhood retailers will likely change that.
Last year, DG tried to acquire #2 discounter Family Dollar Stores, Inc. (NYSE:FDO). But fearing antitrust issues, FDO stock leaders and its board of directors nixed the deal. Enter Dollar Tree, Inc. (NASDAQ:DLTR), the #3 deep-discounter in the space; FDO accepted DLTR’s offer to acquire it.
By some accounts, DG is still smarting from the deal gone sour. And the company now finds itself in the unenviable position of having to find a way to grow amidst increasing competition and shrinking market share.
Some analysts are still bullish on DG, but sadly the future is bleak for Dollar General. Here’s how good old-fashioned competition derail DG stock.
The Discount Wars Are Heating Up
Big box retailers like Wal-Mart Stores, Inc. (NYSE:WMT) and Target Corporation (NYSE:TGT) are wising up, understanding that there’s a wellspring of customers who favor low-cost neighborhood shopping. With this in mind, WMT and TGT have begun to open smaller neighborhood stores ala the DG and DLTR model.
Right now, smaller neighborhood stores are just a fraction of Walmart’s 3,200-plus Supercenters, but WMT is ramping up efforts to change that. This year the company plans to open 200 smaller stores bringing the total to about 700. And while this may not equate to a huge increase in Walmart’s market share of smaller neighborhood stores, the barbarians are knocking at Dollar General’s gate.
Target has also ramped up efforts to become a player in the deep-discounter arena. With only a handful of TargetExpress stores, TGT is pretty far behind in the game. However, the company has made opening these smaller stores a major priority going forward.
The goal of TGT and WMT is to cater to the urban market where DG and DLTR have so far found lucrative niches. One line of thinking is that the retail market has become so saturated with large stores, retailers have no choice but to open smaller stores.
And it’s a trend that seems to be here to stay. So as retail giants such as TGT and WMT set their sights on the fast-growing urban market, companies like DG may find themselves scrambling for an ever-shrinking share of the pie.
DG Stock by the Numbers
All this comes amid the consolidation in the discount space through the Dollar Tree-Family Dollar deal, which is sure to put the screws to DG stock as well.
And even worse, this trend of competition is amid the backdrop of disappointing Dollar General earnings.
According to Dollar General’s latest quarterly earnings report, the company had an EPS of 79 cents, not quite meeting the Thompson Reuters consensus estimate of 80 cents. Revenue stood at $4.72 billion for the quarter, also missing analysts’ estimates of $4.76 billion. Yes, company’s revenue for the quarter saw an increase of 7.8% compared to the same period the year before, but that still wasn’t good enough to lift DG stock — and Bank of America analysts actually lowered Dollar General to a “sell” as a result.
With more than 11,500 stores in 40 states, DG is currently the largest deep-discount retailer in the country. However, DLTR is poised to take that position with its acquisition of FDR, its total number of stores climbing above 13,000.
Add the entrance of WMT and TGT to the smaller neighborhood stores landscape and it equals DG facing increased pressure from hungry competitors.
As of this writing, Will Emerson did not hold a position in any of the aforementioned securities.
