Owing to the rising preference for home-cooked meals over restaurant food and rapid digitization, the grocery market is primed for a remarkable expansion in the foreseeable future. Moreover, the inelastic demand for groceries should help the industry navigate any economic challenges in the near term.
Grocery companies DLTR and DG are scheduled to report their fourth-quarter results on March 13 and 14, respectively. Street expects DG’s revenue and EPS for the fiscal fourth quarter of 2023 (ended February 2, 2024) to be $9.78 billion and $1.73, down 4.2% and 41.6% year-over-year, respectively. On the contrary, DLTR’s revenue and EPS for the same quarter (ended February 3, 2024) are expected to increase 12% and 29.8% year-over-year to $8.65 billion and $2.65, respectively.
Given this backdrop, grocery stocks Dollar General Corporation (DG) and Dollar Tree, Inc. (DLTR) should be kept on one's watchlist for better entry opportunities. But first, let’s take a quick look at the industry landscape before delving deeper into the fundamentals of the two stocks.
A shift in consumer demand from eating out to preparing home-cooked meals has been observed, as grocery prices have come to an ease faster than restaurant menu prices. This change is driving grocery sales rapidly.
According to new insights from 84.51°, over half of the omnichannel shoppers, or those buying their groceries both in-store and online, prefer buying online because it’s less stressful than shopping in-store.
Moreover, the grocery industry is largely driven by the demand for faster and more efficient order fulfillment, which is led by the incorporation of advanced technologies. Automated warehouses with robotics and AI ensure low-cost, accurate, and quick order packing and dispatch, enhancing customer experience.
Grocery retailers have started focusing on personalization, which guarantees consumers a customized product and enhances customer satisfaction. Retailers utilize consumer data to modify shopping experiences. Additionally, a rise in healthy lifestyle choices has led to personalized nutritional guidance, improving grocer and consumer relationships.
Consequently, the supermarket industry is estimated to reach $1.16 trillion by 2029, growing at a 3.3% CAGR.
Given the industry tailwinds, it's time to examine the fundamentals of the two stocks to hold in the Grocery/Big Box Retailers industry.
Stocks to Hold:
Stock #2: Dollar General Corporation (DG)
DG provides various merchandise products in the southern, southwestern, midwestern, and eastern U.S. The company offers merchandise, including consumable items, seasonal items, home products and apparel.
On February 24, DG celebrated the grand opening of its 20,000th store at its DG Market location in Alice, Texas, marking its continued commitment to providing communities with convenient and affordable access to household essentials and nutritious foods.
On January 30, DG surpassed its latest milestone by offering fresh produce options in more than 5,000 stores across the country. With this achievement, DG has more individual points of produce distribution than any other U.S. mass retailer or grocer.
DG pays an annual dividend of $2.36 per share, which translates to a dividend yield of 1.50% on the current share price. Its four-year average yield is 0.95%. DG’s dividend payments have grown at CAGRs of 17.9% and 15.3% over the past three and five years, respectively.
DG’s trailing-12-month cash from operations of $2.18 billion is 145.8% higher than the industry average of $886.24 million. However, the stock’s levered FCF margin is negative 0.30%, compared to the industry average of 5.26%.
For the fiscal third quarter that ended November 3, 2023, DG’s net sales increased 2.4% year-over-year to $9.69 billion, while non-GAAP gross profit stood at $2.81 billion. For the same quarter, the company’s net income and earnings per share stood at $1.26 billion and $5.73, respectively. As of November 3, 2023, DG’s total current assets amounted to $8.27 billion, compared to $8.02 billion as of October 28, 2022.
Street expects DG’s revenue for the fiscal year 2023 to increase 2.1% year-over-year to $38.62 billion. The company’s EPS is expected to decline 30.1% year-over-year to $7.46 for the same period.
The stock has declined 27.7% over the past year but gained 23.7% over the past six months to close the last trading session at $157.31.
DG’s mixed fundamentals are reflected in its POWR Ratings. The stock has an overall C rating, equating to Neutral in our proprietary rating system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
The stock has a C grade for Value, Stability, Sentiment, and Quality. Within the A-rated Grocery/Big Box Retailers industry, DG is ranked #37 out of 38 stocks.
To see additional POWR Ratings for Growth and Momentum for DG, click here.
Stock #1: Dollar Tree, Inc. (DLTR)
DLTR operates discount variety retail stores under two segments: Dollar Tree and Family Dollar. It offers a wide range of merchandise, including consumables, household items, seasonal goods, apparel, electronics, and more at fixed prices, with Dollar Tree items priced at $1.25.
On March 7, DLTR collaborated with Ibotta Performance Network, the first digital network that delivers coordinated promotions across retailer platforms, large third-party publisher sites and Ibotta’s leading direct-to-consumer properties. The collaboration aims to advance DLTR’s digital engagement and customer experience to drive more value and loyalty among its customers.
DLTR’s trailing-12-month cash from operations of $2.31 billion is 160.7% higher than the industry average of $886.24 million. However, the stock’s levered FCF margin of 1.44% is 72.5% lower than the industry average of 5.26%.
During the fiscal third quarter that ended October 28, 2023, DLTR’s total revenue increased 5.4% year-over-year to $7.31 billion, while adjusted operating income stood at $301.70 million. Furthermore, the company’s adjusted net income and adjusted EPS stood at $212 million and $0.97, respectively. As of October 28, 2023, DLTR’s total current liabilities amounted to $4.65 billion, compared to $4.68 billion as of October 29, 2022.
Analysts expect DLTR’s revenue for the fiscal year 2023 to increase 8.1% year-over-year to $30.63 billion, while EPS is estimated to decline 16.6% year-over-year to $6.01. Moreover, the company surpassed consensus revenue estimates in three of the trailing four quarters, which is impressive.
The stock has declined 1.4% intraday but gained 27.5% over the past six months to close the last trading session at $147.91.
DLTR’s mixed prospects are reflected in its POWR Ratings. The stock has an overall C rating, equating to Neutral in our proprietary rating system.
DLTR has a C grade for Growth, Value, Stability, Sentiment, and Quality. Within the same industry, it is ranked #34.
Beyond what we’ve stated above, we have also rated the stock for Momentum. Get all ratings of DLTR here.
What To Do Next?
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DG shares were unchanged in premarket trading Monday. Year-to-date, DG has gained 16.22%, versus a 7.66% rise in the benchmark S&P 500 index during the same period.
About the Author: Neha Panjwani
From her school days, Neha harbored a profound fascination for finance, a passion that steered her toward a career as an investment analyst following the completion of her bachelor's degree in commerce. Currently enrolled in the CFA program, Neha is dedicated to further enriching her comprehension of investment fundamentals. Neha's primary objective is to aid retail investors in discerning optimal investment opportunities by diligently evaluating crucial aspects of financial instruments, with a primary focus on stocks and ETFs. Her commitment lies in empowering individuals to make informed and strategic investment decisions in the dynamic world of finance.
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