Is Dollar General Deploying Capital Efficiently?
Dollar General’s store expansion has been vital to the company’s top line growth
As we discussed, Dollar General (DG) has a presence in 44 US states through its 13,000 stores. It plans to add another 1,000 stores in fiscal 2017 and has already identified 13,000 new store opportunities.
Growing its store count helped the company managing reasonable top line growth of 7.9% in fiscal 2016 despite modest growth of 0.9% in same-store sales. The company opened 900 stores in fiscal 2016. This feat is particularly impressive compared to other retailers like Target (TGT) and Walmart (WMT), which had to shut down stores to expand their online presence and fight the retail giant Amazon (AMZN).
But is management moving in the right direction? Are these investments providing enough returns to shareholders?
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A look at returns on capital invested
Dollar General has indeed followed a disciplined approach to growth, which you can see in the improvement in IRR (internal rate of return) that the company has achieved on its new store openings. As you can see from the chart below, the first year IRR on new stores improved from 19% in fiscal 2012 to 20.9% in fiscal 2015. The company has also been able to maintain the average payback time of fewer than two years on these stores.
DG’s ROIC (return on invested capital) is impressive. It has improved from 11.6% in fiscal 2014 to 13.7% in fiscal 2016, which suggests that management has been working efficiently in deploying capital.
Investors looking for exposure to Dollar General through ETFs can consider the ProShares DJ Brookfield Global Infrastructure ETF (TOLZ), which invests 3.6% of its total holdings in the company.