Analyst Note| Zain Akbari, CFA |
With a time value of money-related adjustment offsetting soft fourth-quarter profitability and fiscal 2021 guidance, our $181 per share valuation of narrow-moat Dollar General should not change much after it posted earnings. Fiscal 2021 should prove choppy as retailers face increasing competition for discretionary dollars from more pandemic-affected sectors (like restaurants) as vaccine availability rises and as chains lap difficult 2020 comparisons alongside escalating freight costs. Still, Dollar General’s future looks bright, as we are encouraged by progress in its long-term initiatives (particularly its work to boost its non-consumable assortment and increase self-distribution of cold-storage items). We still expect mid-single-digit percentage top-line growth and high-single-digit operating margins over the next decade. However, despite the shares’ low- to mid-single-digit percentage dip after the news, we suggest investors seek a larger margin of safety.