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This Company Might Actually Benefit (Eventually) From Rate Hikes

It's not a bank, yet it could do well in the wake of Fed rate hikes, Real Money Columnist Stephen ‘Sarge’ Guilfoyle argues.

In a rising rate environment, about the only companies you might expect to do well are banks, since they can expand the margins on the loans they issue.

But Real Money Columnist Stephen “Sarge” Guilfoyle has another idea to consider.

The Federal Reserve is conducting a series of rate hikes in 2022 to slow down economic growth, inflation and rising prices for consumer goods. It all portends slower growth in coming quarters which could  benefit companies like Dollar General  (DG) -   next year, Guilfoyle argues.

“With the Fed's outlook for 2023 illustrating reduced economic growth coupled with positive real rates, there is a good chance that 2023 is going to be the year of the dollar stores,” . “That said, that's a long way out.”

The comments came after Dollar General posted lackluster fourth-quarter results.  The discount retailer reported GAAP EPS of $2.57 on revenue of $8.65 billion, which both missed Wall Street's estimates. The sales number amounted to annual growth of only 2.9%.

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The uncertainty of the impact of the global pandemic impacted shoppers and their confidence about the future of the economy, Dollar General said.

Fourth-quarter same-store sales fell by 1.4%, but did rise by 11.3% compared with the same period two years ago, immediately prior to the onset of the Covid pandemic. The company’s fiscal full year same store sales also decreased by 2.8%, but rose by 13.5% from two years ago. 

Dollar General reported its quarterly operating profit dropped 8.7%, while its fiscal full year operating profit declined by 9.4%. Annual cash flow from operations reached $2.9 billion.

The company also spent $2.5 billion repurchasing common stock and paid a $0.55 quarterly dividend.

“I don't love the balance sheet, but it does not fail the Sarge test. Yet. Keep an eye on cash levels for a firm planning to repurchase more than enough shares, increasing the dividend, and carrying enough debt,” Guilfoyle wrote.