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Why Dollar General Could Make Further Gains

Dollar General Corp. (NYSE:DG) could produce further capital gains after its 37% rise over the past 12 months.

The retailer is investing in its online growth prospects, introducing new products and is seeking to improve its efficiency.

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Online growth

The discount retail company consolidated its mobile apps during the third quarter of fiscal 2020. Bringing them all together in one place makes it simpler and easier for customers to access, which could contribute to an increased adoption rate of Dollar General's mobile app among consumers. In turn, this may increase the retailer's sales growth, since customers that use its mobile app typically spend twice as much as its average customers.

The business is also investing in a faster checkout service, which will enable customers to use their mobile phones to scan items as they shop, increasing the checkout speed. The service was rolled out to an additional 3,000 Dollar General stores in the third quarter, and is now available in 15,000 stores.

The retailer plans to introduce a pilot scheme of its "buy online, pickup in store" service in the fourth quarter. This could make the shopping experience more convenient for customers, and may help to encourage them to make more frequent visits.

New products

Dollar General is increasing its range of non-grocery goods, such as homeware and party items. They are now available in 2,100 of its stores and it plans to include them in 2,400 of its stores by the end of fiscal 2020. The company's non-grocery items attract consumers who may not have previously visited its stores, and offer cross-selling opportunities for the business. They have contributed to the company's improved rate of sales growth and margin increases in stores where they have been rolled out.

In addition, the retailer is making changes to its private brand portfolio. These include the introduction of several new brands that have resonated with customers and new product launches within its existing brands. This could improve Dollar General's profitability, since its private label brands offer higher margins than most of its products and greater differentiation versus sector peers.

Potential risks

The outlook for U.S. retailers continues to be uncertain. Data released by the Conference Board in December highlighted that consumer sentiment deteriorated from the previous month. This could lead to lower levels of consumer spending, making it more difficult for Dollar General to increase its profitability.

Investor sentiment may also be suppressed by the ongoing threat of additional tariffs on imports from China. This could weigh on consumer spending levels and cause challenging operating conditions for the business.

In response, the company is reducing its costs by streamlining its operations and reducing the amount of time it takes to restock store shelves. This could reduce the amount of labor the company requires at a time when wage growth is rising in many parts of the U.S.

The company is also opening additional distribution centers to reduce its freight costs and increase the availability of its products. This could improve its customer satisfaction levels and boost its financial performance.

Outlook

Market analysts project Dollar General will grow earnings per share by 12% in 2021. The forward price-earnings ratio of 23.2 suggests that the retailer could offer further capital returns as it deploys its growth strategy.

Disclosure: The author has no positions in any stocks mentioned.

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This article first appeared on GuruFocus.