DOL from the outside looks like it is in good shape. It has seen continuous revenue growth with a good blended operation margin of 39%. It is also consistently paying out dividends while expanding their stores.
The problem comes from what DOL is doing to look like this. DOL’s revenue growth is entirely from opening its new locations. Its same-store sales have not risen. DOL is taking out more long-term debt to fuel its rapid expansion, opening more than 57 stores in 2018, and planning to expand even more than 57 stores in the coming years. DOL is also buying back equity, but it cannot be confirmed if it was using the new debt to do so. DOL has also declared in its 10-k to increasing its dividends
DOL uses 85% equity and 15% debt. It has a negative shareholder equity book value because of growing dividend PMTs as well as aggressive stock repurchases. As of march 28, 2019. DOL’s board of directors have decided to increase their dividend payout rate by 10% to 0.044. This is misleading because the number of shares have decreased from aggressive buybacks. I believe MGMT is attempting to keep their bullish appearance by keeping dividend growth steady, making DOL looks steady.
As a comparison, Dollar General INC, the American leader in this field, has much steadier dividend increases and also have steady equity value increases since 2017. This is evidence that DOL cannot maintain their current growth in dividend payouts while also buying back shares.
DOL has an average paypack period of 2-years for their stores, but do not have a set plan for expanding its distribution capacities while rapidly expanding.
I believe DOL has overextended themselves in a bid to position themselves as an attractive, high-growing discount retailer who pays consistent dividends.
