January 22, 2015 / 10:46 PM / in 3 years

Dollar General could look to smaller acquisitions for growth

(Reuters) - Dollar General Corp (DG.N) could make smaller acquisitions and build its store footprint to better compete with Dollar Tree Inc (DLTR.O), which is poised to become the largest discount retailer after its acquisition of Family Dollar Stores Inc FDO.N.

The sign outside the Dollar General store in Westminster, Colorado is pictured December 4, 2014. REUTERS/Rick Wilking

On Thursday, Family Dollar shareholders approved a cash-and-stock deal to be bought by Dollar Tree for $8.5 billion, derailing Dollar General’s $9.1 billion all-cash offer.

The deal, which will give the combined company more than 13,000 stores and more than $18 billion in annual sales, is not expected to hurt Dollar General’s growth and competitive standing, analysts said.

Stifel, Nicolaus & Co analyst Taylor LaBarr said that Dollar General is now expected to focus on expanding its footprint of more than 11,500 stores, while Dollar Tree slows store openings to integrate Family Dollar.

The company also has a competitive edge for up to two years as Dollar Tree enters a period of financial and operational frictions related to the integration, he wrote.

Dollar General said in December it was on track to open about 700 stores in the year ending in January.

The company declined to comment for this story.

“With gas prices down considerably over the past two months and home heating bills likely to (be) far lower than last year, there are several reasons to be more optimistic on the sales front in the coming periods for Dollar General,” Sterne, Agee & Leach analyst Charles Grom wrote in a note.

Grom also said the extension of Dollar General chief executive officer’s term was a “big win” for the company at a time it is facing growing competition from smaller format stores by Wal-Mart Stores Inc (WMT.N) and Target Corp (TGT.N).

The company said its Chief Executive Officer Rick Dreiling, slated to step down at the end of May, would now stay on till January 2016.

Grom said Dreiling needs to focus on expansion and prepare the company to face competitive threats, which now includes the Dollar Tree-Family Dollar combination.

Dollar General has not detailed its strategy after losing out on Family Dollar.

On an analyst call in December, the company outlined a strategy that included focusing on affordability, selling more higher-margin private label goods, and promoting its digital coupon program.

Analysts including S&P Capital IQ’s Efraim Levy said Dollar General could look to grow faster by making tuck-in acquisitions.

History shows that Dollar General, founded in 1939, has been averse to making acquisitions. Had it acquired Family Dollar, it would have been its first acquisition in three decades.

Dollar General’s shares closed up 3.8 percent at $69.77 on the New York Stock Exchange on Thursday.

Additional reporting by Yashaswini Swamynathan in Bengaluru; Writing by Siddharth Cavale; Editing by Lisa Shumaker

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