March 29, 2019 Alternative Investment Fund Comparable Metrics Ticker: “DG” Market Cap: 31.25 B EV: 33.89 B Dividend Yield: 1% Common Shares CAGR Growth: -3.00% Dollar General FCF Yield on EV 5.01% Revenue 1 yr 9.18% Free Cash ROA 13.13% FCF Margin 6.64% Dollar Tree/Family Dollar FCF Yield on EV 3.91% Revenue 1 yr 2.60% Free Cash ROA 8.85% FCF Margin 5.02% Walmart FCF Yield on EV 4.80% Revenue 1 yr 2.81% Free Cash ROA 7.54% FCF Margin 3.44% Market Misperception Expansion into suburban/urban areas exposes Dollar General to greater competition for mass merchandisers, groceries, and other outlets. Digital retailers will minimize distribution cost to make smaller orders delivered to far-flung areas more economical, thus diminishing Dollar General’s value value proposition. Together, the competition in the retail sector is going to intensify, as digital and conventional retailers challenge Dollar General’s standing. No tangible threat from ecommerce like Amazon because it takes time to ship to remote areas and shipping low value items to rural areas itself is cost prohibitive Total addressable market for Dollar General is still vastly undersaturated from estimated growth opportunity, and it will open 975 and remodel 1000 more stores this year Not really, DG is disrupting the brick and mortar business by taking over the low end market that retail giants such as Walmart are unwilling to get into Investment Thesis Points Ability to minimize operational cost and maximize margin Continued sales growth and expansion in strategic areas No foreseeable competition that could hinder growth ▪ DG opened 1315 new stores in 2017 and 900 in 2018 and has continued to increase SSS for the past 29 consecutive years ▪ DG has strong ambition to win over more low-end consumers as each remodel store generates 4% to 5% comp lift. ▪ Majority of its stores are located in rural and suburban area, which costs DG less to operate ▪ DG doesn’t own its stores, which keeps real estate cost down, and the per store opening cost is $250,000, much lower than other retailer at new location, and hires minimum number of workers ▪ DG offers prices that are 20% to 40% below typical drug and grocery stores, comparable to prices of Walmart in places where Walmart isn’t present ▪ Doesn’t make sense financially for big-box retailer to get into DG’s low end market 1 2 3 Competitors that failed 1 2 3 No tangible threat from competitors with greater economies of scale like Walmart since Walmart Express failed (closed 102 stores) and DG bought the 41 best locations. Family Dollar fell into the trap of competing on price in poor locations. Dollar Tree plans on closing 390 stores, and the once deemed “Amazon-proof” store is in decline. Better access to key consumers 1 2 Dollar General Dollar Tree 23% further from nearest Walmart than Dollar Tree Two-Sample t-Test demonstrates statistical significance Common Share Valuation Price Target: $177.10 (51% Upside) Assumptions: Continued 7.5% Revenue CAGR 20x Exit Multiple (~20x Current) 5.2% WACC Consistency & Low Downside Probability | | | | | | Early 90s Recession Dot-com Collapse Great Recession DG Fresh Will Wipe Out Grocery Store Competition High IRR & Payback On New Stores Compelling New Store Returns Proven Management w/ No Excess Compensation Macro Headwinds Overshadow Any Future Tailwinds