Dollar General (DG) Gains from Walmart (WMT) Closures - Piper Jaffray

Piper Jaffray analyst, Peter Keith, performed a geographic analysis on the Walmart (NYSE: WMT) store closings and found that Dollar General (NYSE: DG) stands to benefit the most. The contribution is relatively small but a large delta considering the small comp store sales growth numbers.

WMT planned to close 125 Walmart Express stores and Neighborhood Market stores on or before 1/28/16 (out of 269 total global closures). In looking at the distance of Dollar General, Family Dollar and Dollar Tree to these closures, results heavily favor DG. Median distance to a closed store was 0.8 miles for DG, 7.5 miles for FDO and 13.4 miles for DLTR. Also, 74% of store closing are within 3 miles of a DG vs. 34% for FDO.

Market share gains from the closed stores should be a 30-40 basis point comp driver and result in a ~$0.035 benefit to 2016 EPS. The analyst estimates a ~$375M sales opportunity ($3M in average sales per closed box) from the closure of 102 Walmart Express stores and 23 Neighborhood market stores. DG could capture 20% of the sales, which equates to a 35 bps comp benefit. At a 20% flow through margin, this is a $0.035 EPS benefit. While a 30-40 bps comp lift is not huge, it is meaningful under the context of a 2016 consensus comp estimate of 2.8%.

DG lacks exposure to a wide number of concerns including: international sales, food price deflation, and e-commerce threat. Also, its heavy emphasis on consumables and small ticket items should provide consistency in uncertain times. The company is addressing its cost structure, and the March analyst day could provide greater clarity on long-term EPS and margin targets.

No change to Overweight rating. The $78 PT is based on 16x 2017E EPS of $4.89.

For an analyst ratings summary and ratings history on Dollar General click here. For more ratings news on Dollar General click here.

Shares of Dollar General closed at $73.40 yesterday.

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