DG DOLLAR GENERAL CORPORATION

Sector financial performance:

This company, primarily a discount retailer selling consumables, seasonal items, and home products and apparels, has been grouped into discount stores sector in retail industry.

It seems that demand for products and service of companies in this sector has been very strong as indicated by growth the same store sales (average 3-4% annual growth rate) in the past several years, which can be attributable more on increasing transaction size (mark-o) than increasing transaction counts. Growth has also come from expansion of reach of stores. It seems that traffic was able to quickly catch up in newly opened stores. The lower pricing items seem to have been less impacted by unfavourable retail industry climate, as characterised by slowing down traffic in the stores, than higher pricing items. It seems that the traffic may be slowing in 2018 as indicated by smaller increase or decrease in transactions and thus the smaller comparable sales growth in 2018 compared with 2017.

As a result of lower merchandise costs and rising mark-on, we have seen about 150 basis points increase in gross margin from the typical companies (around 34% in 2018). The typical operating margin is now at about 13% (with a large range of 8-23%) with a SG&A as percentage of sales of about 21%. The average operating margin seems to go down slightly in 2018 probably due to lese mark on resulted from pressure of slowing traffic.

The typical average stock Price/cash flow ratio is: 25(interest/EBI ratio of 15%) and stock price/sales ratio is about 2.0.

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Company performance:

It seems that the demand for products/service of this company in the past several years has been strong as indicated by the continuing increase in both same store traffic and transaction size during the same period of time. However, it seems that traffic fluctuated in 2018 (down first but bounce back in 2Q). Consumables products present category with the fastest growth.

The first six months of fiscal 2018 compared with the same period of 2017

Same store sales increased 2.9% (3.7% for 2Q) due to increase in both transaction size (volume and price up) offset by decline in traffic (consumables and seasonal products up)

The fiscal 2017 compared with 2016

Same store sales increased 2.7% due to increase in both transaction size and traffic (consumables and seasonal products)

2016 compared with 2015

Same store sales increased 0.9% due to increase in transaction size. (Consumables and home products)

2015 compared with 2014

Same store sales increased 2.8% due to increase in both transaction size and traffic. (Consumables and home products)

Its gross margin has been flat at around 31% since 2014. However, due to the increase of about 90 basis points in SG&A as percentage of sales (around 22%) as a result of increased labor costs, its operating margin went down to about 8.5% in 2018.

Stock price

This stock currently has an enterprise price/EBI ratio of 24 ($109). We think that its stock is being relatively fairly valued compared with its peers.

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