Option Trade 
Dollar General Corp. (NYSE:DG) Calls 
Monday, June 01, 2015

**OPTION TRADE: Buy the DG Aug 2015 75.000 call (DG150821C00075000) at or under $1.60. Place a protective stop loss at $0.65, and a pre-determined sell at $3.00.

by Ian Harvey

June 01, 2015

Introduction

The Q1 2015 earnings report for large cap dollar store stock Dollar General Corp. (NYSE: DG), a discount retailer and competitor of Dollar Tree, Inc (NASDAQ: DLTR) and Family Dollar Stores, Inc (NYSE: FDO), is scheduled before the market opens on Tuesday, June 2nd.

Dollar General posted in-line earnings in the last quarter. In its fiscal 2015 guidance, the company hinted that the West Coast port disruption will have a negative impact on its first-quarter fiscal 2015 earnings per share.

However, despite the above odds, the company's commitment toward better price management, cost containment, private label offering, effective inventory management, merchandise and operational initiatives cannot be ignored, and many analysts also have this point of view.

Technical Details

Shares of Dollar General Corp. opened at 73.83 on Monday. Dollar General Corp. has a 52 week low of $53.00 and a 52 week high of $76.99.

The stock has a 50-day moving average of $72.68 and a 200-day moving average of $72.78. The company has a market cap of $22.05 billion and a P/E ratio of 20.82.

Earnings

Previous Earnings

Dollar General Corp. last announced its earnings results on Thursday, March 12th. The company reported $1.17 EPS for the quarter, meeting the Thomson Reuters consensus estimate of $1.17. The company had revenue of $4.94 billion for the quarter, compared to the consensus estimate of $4.97 billion.

During the same quarter in the prior year, the company posted $1.01 earnings per share. The company’s quarterly revenue was up 9.9% on a year-over-year basis. On average, analysts predict that Dollar General Corp. will post $3.94 earnings per share for the current fiscal year.

Expected Earnings

MKM Partners provided a detailed view on Dollar General Corp.'s upcoming first-quarter 2015 (1QFY15) results, in a research note on Friday. Also, MKM reiterated a Buy rating on the stock with a price target of $82, ahead of the quarterly release.

The equity research firm expects solid same-store sales growth in the quarter, market share gains and improved margins compared to recent quarters. The firm sees the stock as undervalued at current levels, and expects a 3.5% increase in same-store sales. Furthermore, it believes the Street’s estimate of 4.2% growth is quite achievable. February was quite weak for the company due to extreme weather conditions, but business picked up nicely in March and April.

The company announced the appointment of its ex-COO Todd Vasos as CEO, effective from July 3. The company believes that Mr. Vasos is well-qualified for the position, given his six years of experience in Dollar General and strong merchandising background.

MKM Partners analyst Partrick McKeever said:

“While Dollar General has shown an ability to generate strong results in tough economic times, we believe the company (and industry) can do even better when its core customer is doing better.”

"The lower gas prices hasn’t yet stimulated the spending pickup but is a distinct positive, and combined with lower unemployment sets a constructive backdrop for the company’s core customers.",
he further added.

Mr. McKeever continues to estimate 1QFY15 earnings per share (EPS) of $0.81, growing 13% year-over-year (YoY). He forecasts operating margins to increase by 10 bps compared to the same quarter last year, and a total quarterly revenue of $4.91 billion.

Separately, TheStreet Ratings team rates Dollar General Corp as a Buy with a ratings score of A. TheStreet Ratings Team has this to say about their recommendation:

"We rate Dollar General Corp (DG) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, solid stock price performance, growth in earnings per share, increase in net income and largely solid financial position with reasonable debt levels by most measures. We feel its strengths outweigh the fact that the company shows low profit margins."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

• DG's revenue growth has slightly outpaced the industry average of 2.1%. Since the same quarter one year prior, revenues slightly increased by 9.9%. Growth in the company's revenue appears to have helped boost the earnings per share.

• Investors have apparently begun to recognize positive factors similar to those we have mentioned in this report, including earnings growth. This has helped drive up the company's shares by a sharp 33.98% over the past year, a rise that has exceeded that of the S&P 500 Index. Turning to the future, naturally, any stock can fall in a major bear market. However, in almost any other environment, the stock should continue to move higher despite the fact that it has already enjoyed nice gains in the past year.

• Dollar General Corp has improved earnings per share by 15.8% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, Dollar General Corp increased its bottom line by earning $3.50 versus $3.17 in the prior year. This year, the market expects an improvement in earnings ($3.95 versus $3.50).

• The net income growth from the same quarter one year ago has greatly exceeded that of the S&P 500, but is less than that of the Multiline Retail industry average. The net income increased by 10.3% when compared to the same quarter one year prior, going from $322.17 million to $355.37 million.

• Net operating cash flow has slightly increased to $474.20 million or 4.79% when compared to the same quarter last year. Despite an increase in cash flow of 4.79%, Dollar General Corp is still growing at a significantly lower rate than the industry average of 104.17%.

Moving Forward

• Dollar General (NYSE:DG) announces it opened its 12,000th store with a new location in Georgia.

• The company expects to open 730 stores this year and update or relocate 875 more.

• The strategic moves from the Tennessee HQ take into account the impact in some markets of the Dollar Tree-Family Dollar merger.

• Though Dollar General made a strong bid for Family Dollar, many Wall Street firms actually turned more bullish on the stock after it lost the chase.

• Goldman Sach has a Conviction Buy list rating on DG, while Deutsche Bank and Sterne Agee, and Jefferies are all locked in with Buy ratings.

• Dollar General +2.70% YTD.

Analysts Opinions

Analysts at Goldman Sachs added the discount retailer, Dollar General Corp., to the firm's "conviction buy" list from “buy”, and with a higher price target of $87 from $85 last Tuesday.

Goldman cited Dollar General's long-term growth driven by the company's robust fundamentals, as well as its attractive valuation.

The firm also pointed to tailwinds from low-income consumers as well as the discount retailer's competitive advantages.

"We note DG has significantly lower import exposure versus Dollar Tree (DLTR), DG sells essentially no produce and limited dairy, and we have already factored wage pressure into our estimates, as we embed less leverage in the out years to incorporate potential wage hikes," Goldman Sachs analysts wrote in a report.

The firm added that its numbers do not factor in the potential upside from consolidation in the dollar store industry.

Also, Zacks upgraded shares of Dollar General Corp. from a hold rating to a buy rating in a research report sent to investors on Monday, 18th May. The firm currently has an $84.00 price target on the stock.

Zacks’ analyst wrote, “Dollar General posted fourth-quarter fiscal 2014 results, wherein both the top and the bottom lines rose year over year on the back of growth across Consumables, Seasonal, Home products and Apparel categories. Earnings per share met the Zacks’ estimate, but net sales came below expectation. We believe Dollar General’s initiatives with regard to management of inventory, merchandise and operations are likely to push up sales, as evident from the 8% to 9% sales growth forecast for fiscal 2015. However, margins are likely to remain under pressure due to higher sales of lower margin carrying consumables and West Coast port disruption. Management had earlier hinted that a slowdown at West Coast port will adversely impact first-quarter fiscal 2015 earnings per share.”

The company has also been the subject of a number of other research reports:-

• Analysts at Deutsche Bank raised their price target on shares of Dollar General Corp. from $80.00 to $85.00 and gave the company a buy rating in a research note on Wednesday, April 8th.

• Analysts at Sterne Agee CRT set a $83.00 price target on shares of Dollar General Corp. and gave the company a buy rating in a research note on Tuesday, March 17th.

• Analysts at Jefferies Group reiterated a buy rating and set a $87.00 price target (up previously from $75.00) on shares of Dollar General Corp. in a research note on Friday, March 13th.

• Finally, analysts at Barclays raised their price target on shares of Dollar General Corp. from $63.00 to $74.00 and gave the company an equal weight rating in a research note on Friday, March 13th.

One analyst has rated the stock with a sell rating, four have issued a hold rating and fifteen have assigned a buy rating to the company’s stock. Dollar General Corp. presently has an average rating of Buy and a consensus price target of $78.38.

Conclusion

For 2015, Dollar general has forecast a year of strong growth including a total sales increase of 8 to 9 percent, same-store sales growth of 3 to 3.5 percent and EPS growth of 10 to 13 percent over 2014 adjusted EPS.

Therefore, based on the facts above the following options trade is recommended…..


**OPTION TRADE: Buy the DG Aug 2015 75.000 call (DG150821C00075000) at or under $1.60. Place a protective stop loss at $0.65, and a pre-determined sell at $3.00.



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