Dollar General (NYSE:DG) stores are not all the same.
They look the same on the outside and, to some extent on the inside. But if you look closely, they’re all different.
Many small towns have a Dollar General because they’re just too small to support a Walmart (NYSE:WMT) or even a standard grocery store. Some Dollar Generals sell high-end booze and cigarettes. Others are food deserts, with just frozen food and ready-to-eat snacks, surrounded by miles of poverty.
This is how Dollar General sawed off the challenge of Dollar Tree (NASDAQ:DLTR) after that company bought Family Dollar in 2015. Since then, Family Dollar has been closing hundreds of outlets, whose one-size-fits-all stocking can’t compete. Over the last two years Dollar General’s stock gain of 91.5% has nearly doubled the 52% gain of its rival, even though the Dollar Tree chain itself caters to upper-income shoppers.
The Secret of Dollar General
Most reporters who covered the “dollar store war” early in this decade missed the point, because most finance reporters seldom leave their desks.
It was the differences among individual Dollar General stores that let DG win the war. Neighborhoods that liked pork rinds got pork rinds. Small towns where some people made more money got higher-end merchandise. One size does not fit all.
Editorial prejudice still prevents reporters from seeing it. Dollar stores are still covered as though they’re all one thing.
Dollar General stores can thrive in towns under 20,000, where people are making under $40,000 per year. It’s this ability to make a profit from poor people that gives Dollar General its bad reputation.
As farming communities plunge into feudalism, with just a few remote landowners and a lot of poverty, Dollar General expands. It’s not always welcomed by everyone, but, for towns that might die otherwise it’s a godsend.
Don’t Blame DG
Poor counties blame Dollar General for their poverty, for taking what money their people do have and spiriting it away for plastic chairs and off-brand detergent.
But where people do have money Dollar General can deal with it, adding seasonal merchandise, FedEx (NYSE:FDX) package drop-offs and delivery, Western Union (NYSE:WU) wire transfers, even fresh produce if there’s a market for it.
Dollar General reflects its markets. This is the mirror poor neighborhoods don’t want held up to them. Dollar General can scoop up whatever money a small town or ghetto might have. Once it is established, it can then cater to whatever middle-class incomes exist there. That’s also part of its business model.
The Dollar General Stock Success Story
This has made Dollar General a great momentum stock, a company that can prosper in both good times and bad.
Dollar General isn’t a fast-growing company, but it is growing. Sales are up 25% over the last three years, and Dollar General brings 6% of that to the net income line. That’s twice what Kroger (NYSE:KR) does, and more than three times what mighty Walmart can do.
This means Dollar General sports a market cap of almost $36 billion on sales of $25 billion. For a retailer this is insane. The only one that can beat it is Costco Wholesale (NASDAQ:COST), which is worth 87% of sales.
The Bottom Line
Dollar General has the reputation of being a bottom feeder, but the bottom must be fed. The company knows which markets it can serve and learns to serve those markets.
The mirror Dollar General holds up to its customers, and to the rest of us, may distress some, but it’s what we are. If we change, the store will change with us.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new environmental story, Bridget O’Flynn and the Bear, available now at the Amazon Kindle store. Write him at email@example.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in KR.