Recession or Pandemic... This Company Wins Either Way

The economy is suffering severely from the COVID-19 crisis...

In addition to rising unemployment, some businesses are hurting badly. But as we've said before, there are also winners in this altered economy. As consumers stock up on goods to deal with coronavirus lockdowns, some retailers are thriving...

Because of COVID-related lockdowns, consumers rushed out to stock up on basic goods. They wanted to make sure they had enough supplies to handle a long lockdown, as well as avoid potentially contracting the virus. That boosted companies that sell staples.

We've seen companies like Walmart (WMT), General Mills (GIS), and Amazon (AMZN) all see surges in demand. This is especially true among "essential" products like household goods and snacks.

Today's company is seeing the same benefit...

Dollar General (NYSE: DG) is the largest "small box" retailer in the U.S., with more than 16,500 stores in 46 states. Its stores provide the winning combination of convenience and low prices.

This is the kind of business that thrives in a recession. When the going gets tough, consumers cut back on spending in almost every area. But the area that holds up best is essential products. This includes things like snacks, cleaning supplies, and health and beauty products.

No matter what is going on in the broader economy, people use these products every day. And that means there's always demand for them.

These are the same products that Dollar General exceeds at selling. The company specializes in low-cost products that need to be replenished regularly. And most of its items cost less than $10. That makes consumers even more likely to turn to the company in economic downturns.

Dollar General just reported a blowout quarter...

First-quarter earnings per share ("EPS") came in at $2.56 versus the estimate of $1.75. Revenue for the quarter was $8.45 billion, topping the consensus of $7.58 billion.

And those weren't the only highlights...

Same-store sales jumped 21.7% in the quarter. All four of its segments – consumables, seasonal, home products, and apparel – posted sales increases of more than 10% in the quarter. Home products sales surged 32%, while consumables sales jumped 29%.

The company said it believes that COVID-19's effects on consumer behavior were a tailwind for its sales, adding that it saw a jump in customer traffic.

Dollar General also noted an increase in average transaction amount, indicating that people spent more to stock up on goods to wait out the lockdowns.

But even as lockdown restrictions are starting to lift, there's still a flood of demand to Dollar General stores...

On the company's recent earnings call, Dollar General CFO John Garrett said Dollar General stores were still experiencing elevated demand, albeit below the levels seen in March and April. He added that there were days in May where the company still saw 20%-plus increases in same-store sales from the year before.

And CEO Todd Vasos said Dollar General has seen an increase in new customers because of the pandemic. He added that this also happened in the Great Recession in 2008 and 2009. Vasos said that he expects Dollar General to hold on to these new customers in the long term.

So Dollar General's performance should remain strong when things return to normal. Looking forward, the company did not provide guidance due to the uncertainty of the economic recovery.

But it did say that it expects to exceed the full-year 2020 sales, net sales, and earnings forecasts it issued in March.

Dollar General had previously estimated net sales growth of 7.5% to 8%, same-store sales growth of 2.5% to 3%, and EPS growth of about 11.5%. The pandemic caused a surge in sales. Now, Dollar General anticipates its results to be stronger than expected.

During the market sell-off in March, DG shares fared better than the broader indexes. Dollar General "only" fell 18% from its February 21 high to its March 16 low. The S&P 500 Index, on the other hand, fell 34% from its February 19 high to its March 23 low.

And since bottoming, DG shares have surged higher. The stock is up more than 40% from its lows in March, and just hit an all-time high.

Dollar General succeeds by selling low-cost items that everyone needs. And in recessions (and pandemics), the company still performs strongly. That should provide a tailwind for DG shares in the coming months.

Sometimes investing is simple.