$达乐(DG)$ 2025-1-1 Semper Augustus letters

Dollar General has an ongoing runway to open new stores. While the cadence of new store openings is
lower today as the company focuses capital on the installed base, square footage should grow at least
5.0% to 6.5% as the company opens not only new stores but remodels and opens larger stores.

Management indicates the store count can grow at least to 30,000. We have no reason to disagree. Same-
store-sales need not grow more than the inflation rate to expect 6.5% to 8.5% annual sales growth over

the coming five to ten years. We have base-case and bear-case scenarios with sales growing only by 5.1%
annually to $52 billion over the next five years. The company suspended share repurchases but as debt is
reduced and the company completes its deferred store maintenance, we expect ongoing repurchases (and
favor a low share price when share repurchases resume). The net margin is highly unlikely to return to
5.5% or 6.0% but our work suggests 4.5% as reasonable. In our bear scenario, net margins only run 3.5%.
The stock is selling today at 13x, capitalized on a depressed 3.1% net margin. The depressed multiple
makes the present dividend yield quite attractive and additive to total return earned prospectively. Our
range for the P/E multiple is 15x to 20x. The investor is likely to see a 20x multiple assuming margins
recover, and the company is back in the good graces of investors.
Using a conservative set of assumptions has the stock returning 257.9% or 29.1% annually in our base
case from current prices. The bear case still produces a more than double total return, returning 114.5%
cumulatively or 16.5% per year. From our higher cost basis, our returns will be lower than from current
prices but will still achieve a good return. For perspective, the base case scenario returns the stock price to
only 90% of its 2022 high.