Omega Advisors adds new position in Dollar General

Market Realist

Overview: Omega Advisors discloses new positions in 1Q14 (Part 2 of 6)

(Continued from Part 1)

Omega Advisors and Dollar General

Leon G. Cooperman’s Omega Advisors added new positions in Dollar General (DG), ADT Corp. (ADT), and Time Warner Cable (TWC). Top positions sold were T-Mobile U.S. (TMUS) and General Motors (GM).

Omega’s 13F filing revealed that it initiated a 1.23% position in Dollar General (DG) in 1Q14.

Dollar General is a large discount retailer in the U.S. with 11,338 stores located in 40 states as of May 2, 2014, primarily in the southern, southwestern, mid-western and eastern United States. It offers a broad selection of merchandise, including consumable products such as food, paper and cleaning products, health and beauty products, pet supplies and tobacco products, and non-consumable products such as seasonal merchandise, home decor and domestics, and basic apparel. The retailer said it opened 214 new stores in 1Q14 and plans to open 700 stores for the full year.

Dollar General sees speculation of merger with Family Dollar Stores 

Shares were up over rumors of a merger between Dollar General and Family Dollar Stores (FDO) that circulated after activist investor Carl Icahn recently disclosed a stake in the latter company. Icahn said last week he acquired a 9.4% stake in Matthews-based Family Dollar. In a securities filing, he said that the company was “undervalued” and could see “strategic alternatives.” Family Dollar has witnessed two quarters of weaker-than-expected results due to severe winter weather, macro-economic factors, and the highly competitive and promotional retail environment. Although Dollar General’s recent 1Q results came below estimates, stocks increased as the company stuck to its full year outlook.

Same-store sales growth driven by tobacco products and perishables

Dollar General’s management said “first quarter same-store sales improvement of 1.5% was driven by growth in our consumables business and, overall, reflected the challenges of unfavorable winter weather, heightened competition, and the current economic environment.” They added, “Sales trends began to improve in April and have continued to gain momentum.” Dollar General noted that tobacco products and perishables were the most significant drivers of same-store sales growth in 2013 and continued to increase at a faster rate than overall same-store sales through 1Q14.

Net sales increased 6.8% to $4.52 billion in 1Q14 compared to $4.23 billion in 1Q13. Gross profit, as a percentage of sales, decreased mainly as a result of increased sales of lower margin consumables, including tobacco and perishable products. Net income was $222 million, or $0.72 per diluted share—slightly up from $220 million, or $0.67 per diluted share in the same quarter last year.

Dollar General reiterates full year outlook

The management noted in the 4Q earnings release back in March that, “While we remain cautious on the current operating environment and the many challenges our customer is facing in 2014, we have a business model that generates significant cash flow, putting us in a position to invest in these growth opportunities, while continuing to return cash to shareholders through share repurchases.” It said in its 10-K filing that “successful sales growth initiatives in 2013 included the addition of tobacco products, the expansion of the number of coolers for refrigerated and frozen foods and beverages in over 1,600 existing stores, the optimization of shelf space, including the reduction of hanging apparel in many of its smaller stores, and the impact of 582 remodeled and relocated stores during the year.”

Dollar General further added that “we believe we have opportunities to increase our store productivity in 2014 through continued improvements in store space utilization, pricing and markdown optimization, and additional merchandising initiatives.”

For the 2014 fiscal year, the company expects total sales to increase 8%–9% over the 2013 fiscal year, with same-store sales expected to increase 3%–4%. Diluted earnings per share (or EPS) for the fiscal year is expected to be approximately $3.45–$3.55.

Dollar General saw a downgrade from Deutsche Bank last month that noted, “DG remains one of the best managed companies in retail with a long track record of success. However, heading into 1Q we are concerned that the stock may be unable to outperform this year as numerous headwinds impact results.”

Continue to Part 3

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