After having highlighted what I think will be Wal-Mart’s
(NYSE:WMT) deleterious affect on Family Dollar
(NYSE:FDO) from its growth of Neighborhood Market and Wal-Mart Express (see For Family Dollar, Wal-Mart Threat Is More Serious Than Expected
), I felt that I should provide some perspective for Dollar General
(NYSE:DG) as well.
I believe that Dollar General is a stronger company than Family Dollar. I disagree with those who believe that FDO can near Dollar General's sales per square foot level anytime in the next four years.
While I would not believe the recent Kantar pricing survey showing Dollar General’s prices to be .4% below Wal-Mart's (one survey of only a $29 market basket of goods is certainly not statistically valid), I do believe that its 2-3% level higher than Wal-Mart can be defensible. Possibly some of its Dollar General markets could be big enough for pharmacies in the future, one of the big advantages that many smaller Wal-Marts will have.
While I expect Family Dollar to start feeling the competition in calendar year 2015 and certainly by 2016, my best guess is that Dollar General will not start to feel it intensely until 2017.
Assigning Dollar General stock, at $60, a 6.0% risk discount (half a percentage point less than FDO) and a 4.2% risk-free rate on my earnings discount model, and calculating the implied growth rate through 2016, I get 12%.
That would imply what I think the Street sees as conventional wisdom for Dollar General, namely, growing square footage at 6.5% with 3-4% same-store sales and some SG&A leverage. My conclusion is that the present valuation, for whatever reason, reflects Wal-Mart’s bigger competitive threat, though I do not believe that investors are specifically thinking about that issue.
No positions in stocks mentioned.
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