Buy Dollar General for a slightly stronger than expected U.S. economy

11/01/2012 5:48 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

When I added Dollar General (DG) to my Jubak’s Picks portfolio on October 26, I was following this logic: I think U.S. economic growth will be stronger than expected in the fourth quarter of 2012, but it won’t be so much stronger that U.S. consumers will abandon all efforts to save a buck. And that, I noted, would be good for the higher end (if I can use that term in this context) of the dollar store sector. And for Dollar General (DG) in particular. (For more on that scenario see my post http://jubakpicks.com/  )

I think Dollar General stands out from its competitors such as Dollar Tree (DLTR) because it 1) has moved to add groceries to its mix, making it a more attractive one-stop shopping destination, 2) added more brand names to its product offerings, and 3) isn’t just expanding (625 new stores in 2012) but relocating and renewing stores (575 in 2012) to upgrade the shopping experience.

That has enabled the company to grow gross margins to 31.7% in fiscal 2011 from 25.8% in 2006. And to grow same store sales at a 5.1% rate in the most recent quarter. The company projects same store sales growth of 5.2% for 2012.

Despite an existing store count of 9,800, Dollar General still has room for growth. The company only entered California this year with its first 50 stores. Dollar General operates 1,000 stores in Texas—matching that would give Dollar General plenty of growing room.

So far, growth in the second half of the company’s expansion—management talks about a goal of 20,000 stores--hasn’t resulted in a dip in sales per store. New store sales are actually 43% higher now than they were in 2007 and that has reduced the payback on invested capital per new store to 1.6 years from 2.2 years.

I’d put a target price on these shares of $57 by April 2013.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did not own shares of Dollar General as of the end of June. For a full list of the stocks in the fund as of the end of June see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

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