Just maybe. Is there a best in class in brick and mortar discount retailing? It would appear so. Dollar General (DG) reported the firm's second quarter financial performance on Thursday morning. The firm posted both adjusted and GAAP EPS of $3.12, handily beating expectations either way. That was good for earnings growth of 79%. Sales were hot. Revenue for the quarter landed at $8.68 billion, year over year growth of 24.4%, and another beat for that matter. Same store sales? A cool 18.8% increase over last year, beating consensus view of 14.9%. Sounds great. This kind of firm always seems to do its best when everyone else goes through tough times. Nature of the beast.
Let's check out the direct competition. Dollar Tree (DLTR) also reported on Thursday morning. Dollar Tree posted GAAP EPS of $1.10, a beat, but not of the variety offered up by Dollar General. Revenue for the period printed at $6.29 billion, good enough for a beat, and for annual growth of 9.4%. Same store sales saw growth of 7.2%, about a full percentage point above expectations. Solid performance. No doubt. Interestingly, comp sales were only +3.1% at Dollar Tree bannered locations, but those locations bearing the old 'Family Dollar" name experienced 11.6% comp growth.
Dollar Tree is hitting singles and doubles. They are not disappointing by any stretch. Dollar General however, is executing with precision.
Precision
Dollar General posted for the second quarter a very impressive operating margin of 12.0%, well above the 10% or so that Wall Street was looking for. The gross margin that produced this performance hit the tape at a whopping 32.5%, versus consensus view of 30.8%. The firm explained this improvement as a product of a greater portion of sales coming in non-consumables that bear higher margins to begin with, as well as a reduction in markdowns as a percentage of sales.
As far as return to shareholders is concerned there was some good news. On top of the quarterly $0.36 dividend that will be paid on October 20th to shareholders of record October 6th, the firm beefed up the share repurchase program. While the dividend is all that large in terms of yield (0.71%), the firm authorized the buyback of an additional $2 billion in common stock to a program that only had $481 million remaining in the previous authorization.
On the quarter, CEO Todd Vasos said, "We continue to operate from a position of strength and are excited to announce the acceleration of several key strategic initiatives, including the rollout of DG Pickup, DG Fresh, and our non-consumables initiative, as well as a number of real estate projects for fiscal 2020."
Looking forward, the firm will offer no formal full-year guidance due to the unpredictability of the pandemic and its impact on economic activity. The firm does acknowledge, and seems to understand that there has been increased demand at its locations due to Covid-19.
Discount Shopping, Our Way
Halfway there. What do I mean by that? Take a look.
Readers will see the very familiar cup with handle pattern created by the introduction of the pandemic to our marketplace. That formation is everywhere. You do not see a typical breakout, but you do see a breakout. After hitting pivot point resistance three of four times in April, the shares began a methodic climb over several months that is ongoing. If I were long these shares, my target price would be an even $220. Is that worth it from here? It might be. We never sneeze at 15 bucks. $205 is a lot to risk for $15 though, especially since the economy is just a lucky break or two away from at least attempting to get back to something more normal.
If interested, I would rather not just buy equity. One could purchase the November $210 calls for about $9, sell the November $220 calls for maybe $5.50. That's a net debit of $3.50. In other words, the trader is risking $3.50 to try to bring back $10. The same trader could then sell the November $185 puts (which is where I wish I bought this stock) for almost $5. This turns the entire options position into a net credit, while opening up the trader to equity risk at what looks like a desirable discount. There is always more than one way to skin a hat. Yes, I said hat.
