DG: Dollar General vs. Target: Which Discount Retailer is a Better Buy?

Dollar General Corporation (DG) and Target Corporation (TGT) are established companies in the discount retail space. Both the companies offer a selection of merchandise, including consumables, seasonal home products and apparel across the United States.

In addition to its high-quality private brands, DG also sells products from manufacturers including Procter & Gamble, Hanes, Coca-Cola, Mars, Unilever, and Nestle, to name a few. TGT’s own brands include Archer Farms, Market Pantry, Ava & Viv, Pillowfort, Room Essentials, Wine Cube, Cat & Jack, Simply Balanced, and Wondershop, among others.

Because the demand for online discount retail platforms are on the rise, both DG and TGT are expected to continue performing well in the coming months.

While DG has returned 192.6% over the past five years, TGT has gained 143.1%. In terms of their past-year performance, TGT is a clear winner with 37.7% returns versus DG’s 34.8%. But which of these two stocks is a better pick now? Let us find out.

Latest Movements

DG announced the grand opening of its 17,000th store in Fountain, Colorado, on November 14. To mark the milestone, the company donated $17,000 to the Fountain-Fort Carson School District 8. On November 10, the company announced its plans to build a combination dry and DG Fresh distribution center in Blair, Nebraska. DG also has plans to expand its DG Private Fleet presence at the Blair facility.

The company announced a pre-holiday sales event on November 13. DG offered several deals that deliver more savings to families. DG introduced its newest retail store concept, popshelf, in October, where roughly 95% of the items are priced at $5 or less. DG promoted Kathy Reardon to executive vice president and chief people officer on August 27.

TGT offered contactless pick up and at-home delivery services for the last-minute shoppers — even for those without memberships — till 5 p.m. on December 24. The company also doubled its drive-up parking spaces from last year. The company offered deep discounts on key categories and top items during its largest-ever Cyber Week event, which was held from November 29 to December 5.

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TGT celebrated the one-year anniversary of its popular, easy-to-use loyalty program, Target Circle, on November 12. It offered nearly 80 million members more ways to save more during the holiday season. On November 10, TGT and Ulta Beauty, Inc. (ULTA) announced a strategic, long-term partnership to transform the beauty landscape.

Recent Financial Results

DG’s net sales have climbed 17.3% year-over-year to $8.2 billion for the third quarter ended October 30, 2020. Same-store sales increased 12.2% year-over-year. Its gross profit increased 24.4% year-over-year to $2.6 billion, while net income increased more than 57% year-over-year to $574.3 million, yielding EPS of $2.31, which increased 62.7% year-over-year.

TGT’s total revenue for the third quarter ended October 31, 2020 increased 21.3% year-over-year to $22.6 billion. Comparable sales increased 20.7% year-over-year driven by 155% year-over-year digital comparable sales growth. While comparable traffic increased 4.5% year-over-year, average ticket size increased 15.6% year-over-year. EPS increased 105.1% year-over-year to $2.79.

Past and Expected Financial Performance

DG’s revenue and EBITDA have grown at a CAGR of 11.6% and 16.7%, respectively, over the past three years. Also, the company’s EPS has grown at a CAGR of 30.8% over the same period.

The market expects the company’s revenue to increase 15.7% for the current quarter ending January 31, 2021, 6.2% for the quarter ending April 2021, and 21.1% this year. DG’s EPS is expected to grow 29.5% for the current quarter, and 59.3% this year. Moreover, its EPS is expected to grow at a rate of 16% per annum over the next five years.

In comparison, TGT’s revenue and EBITDA have grown at a CAGR of 8% and 7.7%, respectively, over the past three years. Also, the company’s EPS grew at a CAGR of 16.6% over the same period.

The market expects TGT’s revenue to increase 13.9% for the current quarter ending January 31, 2021, 6.7% for the quarter ending April 30, 2021, and 17.6% this year. The company’s EPS is expected to grow 33.7% for the current quarter, and 41.5% this year. Moreover, TGT’s EPS is expected to grow at a rate of 13.1% per annum over the next five years.

Profitability

TGT’s trailing-12-month revenue is 2.73 DG’s. However, DG is more profitable with a gross margin of 31.6% versus TGT’s 29.4%.

Also, DG’s leverage free cash flow margin of 7.5% compares favorably with TGT’s 6.7%.

Valuation

In terms of forward P/E, DG is currently trading at 19.89x, slightly more expensive than TGT which is currently trading at 19.69x. Moreover, DG is more expensive both in terms of trailing-12-month P/S (1.62x versus TGT’s 1.00x), and trailing-12-month EV/S (1.93x versus TGT’s 1.10x).

In terms of trailing-12-month price to book , DG’s 7.38x is 11.1% higher than TGT’s 6.64x.

Though DG looks slightly more expensive compared to TGT, we think it is worth paying this premium considering DG’s higher earnings growth potential.

POWR Ratings

Both DG and TGT are rated “Strong Buy” in our proprietary POWR Ratings system. Here are how the four components of overall POWR Rating are graded for DG and TGT:

DG has an “A” for Trade Grade and Buy & Hold Grade, and a “B” for Peer Grade, and Industry Rank. It is currently ranked #3 of 18 stocks in the Grocery/Big Box Retailers industry.

TGT holds an “A” for Trade Grade, Buy & Hold Grade, and Peer Grade and a “B” for Industry Rank. It is currently ranked #2 in the same industry.

The Winner

Both DG and TGT are good investment bets considering their market dominance and continued expansion. However, DG appears to be a better buy despite trading at a marginally higher valuation.

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DG shares were trading at $208.54 per share on Monday afternoon, down $1.76 (-0.84%). Year-to-date, DG has declined -0.84%, versus a -1.83% rise in the benchmark S&P 500 index during the same period.

About the Author: Manisha Chatterjee

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst. More...