Dollar General Shares – 3 Pros, 3 Cons

Since coming public in late 2009, the shares of Dollar General (NYSE: DG ) have
done fairly well. Last year, the return was a hefty 36.7%. And now the company
is attracting the interest of Berkshire Hathaway's (NYSE: BRK-A ) Warren
Buffet. According to a recent Securities and Exchange Commission filing, his
firm has purchased 1.5 million shares of Dollar General (it's likely that the
idea came from Todd Combs, who is managing a portion of Berkshire's massive
portfolio). So what are Dollar General's strong points and risks? Let's take
a look: Pros Compelling concept. Dollar General is the largest discount retailer
in the US in terms of store count (nearly 9,500 across 35 states). The company
has a small-box format, with each store about 7,200 square feet. The merchandise
ranges from consumables to home products and apparel (there are more than 10,000
SKUs). The business model has definitely been successful. Keep in mind that
same-store sales have increased for 21 consecutive years. Streamlining
operations. Last year, Dollar General relocated or remodeled 504 stores. As for
this year, the goal is to do the same for 550 stores. The result should be
higher foot traffic and spend levels. Growth opportunity. For the most part,
Dollar General's footprint is east of the Mississippi. In other words, the
company has plenty of room to expand. In fact, Dollar General believes it can
launch 11,000 more stores without saturating its market. Cons Costs. Rising
inflation continues to be a drag on Dollar General. Ultimately, it will become
more difficult to provide low-prices to consumers while maintaining strong
margins. True, the company has a sophisticated logistics system – but it can
only go so far. Competition. It is fierce. Dollar General must deal with rivals
like Family Dollar (NYSE: FDO ), Dollar Tree (Nasdaq: DLTR ) and 99 Cents Only.
There is also competition from the big-box operators such as Wal-Mart (NYSE: WMT
) and Costco (Nasdaq: COST ). Overhang. Dollar General's private equity owner,
Kohlberg Kravis Roberts, still owns 71% of the shares of the company. In the
coming years, the firm will continue to sell its stake, which is likely to put
pressure on the stock price. Verdict Recent data shows economic weakness in the
US. Gross domestic product (GDP) growth dropped to 1.3% and unemployment remains
a problem. But for a company like Dollar General, these are actually positive
indicators. In addition, the company may get a boost in the second-half of the
year as the large drop in oil prices leaves consumers with more disposable
income. So in light of these trends, the pros outweigh the cons on the stock.
Tom Taulli is the author of various books, including "All About Commodities"
and "All About Short Selling." You can find him at Twitter account @ttaulli
. He does not own a position in any of the stocks named here.