50-cent dollar?
Followers of net lease (and most rural Americans) are familiar with national discount retailer Dollar General (NYSE: DG). Operating over 20,000 (mostly leased) stores, the company is a material tenant concentration at several net lease REIT1:
Many real estate investors have blacklisted DG from their acquisition criteria given the lack of rental escalations contained in most leases and the recent operational struggles at the retailer, leading to an exploding supply of single tenant DG properties on market.
Interestingly, although the rural store location net lease deals may not offer a great risk/reward (even at much higher cap rates than 2021/22), the public shares of DG are worth an examination. The stock is down 70% from the all-time high reached in 2022 as margins have compressed, growth has stalled, and the lower end consumer is stretched (this final point is repeated at nauseum in all financial media…). What does the data show?2
DG’s average store sales are up ~3% annually since 2019, buoyed by 5% annual store count growth. Despite overall revenue rising nearly 50% in five years, the company is guiding to $5.70 earnings per share for 2024 (down 11% from 2019).
The use of debt is up but DG remains investment grade-rated and well positioned to weather further challenges. At a 14x 2024 price/guided earnings, the multiple is nearly 50% below 2019 levels. DG continues to add stores (730 and 575 new store openings in FY24 and FY25, respectively).
Trailing twelve-month free cash flow generation of $1.6 billion affords management many options: buy-backs and dividends, accelerated reinvestment or growth, and patience.
Will management ultimately stabilize margins and restart earnings growth? Or is this retail behemoth stuck in the mud? With the S&P 500 trading well over 20x earnings, perhaps DG is a rare analog value in a digital world.
-Sean Hostert