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Why Dollar General Sank After a Strong Q4 Report

Motley Fool Staff, The Motley Fool

Dollar General (NYSE: DG) delivered its fourth-quarter results last Thursday, and there appeared to be plenty for investors to smile about. Comp sales were up by 4% -- a higher result than expected -- and the company is raising its dividend. But Wall Street sent the stock down sharply.

In this segment from MarketFoolery, host Chris Hill and Motley Fool Asset Management's Bill Barker discuss why Dollar General's share price might have been too lofty, the impact of somewhat soft guidance, whether its stock buybacks are a good idea or not, and its overall capital deployment strategy.

A full transcript follows the video.

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This video was recorded on March 14, 2019.

Chris Hill: Let's start with Dollar General. Fourth quarter, this looked good to me. They're raising their quarterly dividend, same-store sales up 4%. That was higher than expected. Stock down about 10%. Is this just because of valuation? This thing has had a pretty good 12 months.

Bill Barker: Yeah. It's a split between the valuation, which is not insane, but it had gone up some 30% over the last year, I believe. Most of that was an improvement in the multiple that people were paying. But it's been growing pretty nicely.

The other thing is that the guidance was a little bit softer than what was expected. You've got decreased guidance and...not a lofty valuation in absolute terms, but a lofty valuation for where Dollar General historically trades, 17 times earnings is kind of the upper end of a normal range for it.

I agree, it was pretty a pretty good report, actually. For a stock that's up as much as it's been in the last year, 10% sounds big today, but if you go back in time and buy this thing a year ago, you'd still do good.

Hill: There are definitely some discount retailers who are doing well. The one question I have, and I don't know if you can answer this, one of the things that Dollar General announced was, they're allocating $1 billion toward stock buybacks. The combination of what the stock has done over the past year -- maybe they're good at this. I don't know, I haven't looked into their buyback history enough to know if they're smart when it comes to timing the buybacks. But I do know that they've spent money remodeling their stores, doing things to improve throughput, shortening up the lines at payment counters, that sort of thing. It seems to me, all things being equal, wouldn't they be better off spending, maybe not $1 billion, but at least a couple of hundred million dollars toward that endeavor?

Barker: What you can do with your extra cash when you've got it is, in terms of a retailer, you can build more stores. You can improve the stores that you've got. Or, you can acquire a competitor or a complementary business. Or you can return cash to shareholders through dividends or share repurchases. They're doing a little bit of all that. I think the authorization to buy back up to another billion gets a little bit of a headline. They've been buying back shares. This is really just feeding that machine of doing a little bit of everything. They increased their dividend. As you noted, they have some initiatives at the store level. They've projected that sales are going to increase about 7%, comp sales for the year up about 2.5%, this is 2019. The implication there is, they're going to have about a 3% to 4.5% higher store count. They're doing a little bit of everything, and I think that's worked out well for shareholders.

Bill Barker has no position in any of the stocks mentioned. Bill Barker is an employee of Motley Fool Asset Management, a separate, sister company of The Motley Fool, LLC. The views of Bill Barker and Motley Fool Asset Management are not the views of The Motley Fool, LLC and should not be taken as such. Chris Hill has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.