Dollar General, the largest discount store in the US, selling everything from canned food to cosmetics and clothes for $10 or less, makes its debut on the New York Stock Exchange today in one of the most keenly anticipated initial public offerings (IPOs) of the year.
The retailer priced its IPO at $21 each, at the low end of expectations. Analysts had expected shares to sell for between $21 to $23.
The company has been a big beneficiary of the recession as consumers have traded down to low-cost goods, and its earnings and profits have been powering ahead for the past two years.
The listing marks a return to the public markets of Kohlberg Kravis Roberts (KKR), the private equity group, after a near two-year absence after the credit crisis and the subsequent weakness in equities.
The public sell-off is for 11 per cent of Dollar General, with the remaining 89.5 per cent in the hands of Buck Holdings, a Delaware limited partnership controlled by KKR.
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Dollar General said that it would use all of its share of the money to pay down debt as well as a fee of about $64 million to KKR and Goldman Sachs, the IPO’s underwriters.
The IPO is the largest flotation by a US retailer in at least 17 years.
In the second quarter of 2009, Dollar General’s same-store sales grew 8.6 per cent, while other dollar- store chains reported figures in the low to mid-single digits. At $176.6 million (£107 million), according to company filings, net income, at $108.2 million, in the first half of this year was higher than the figure for all of 2008.
Dollar General occupies a special place on the US high street. Its 8,500 stores are small at just 7,000 sq ft and are located primarily in small rural or suburban communities where rents are cheap. The company aims to serve customers who have limited disposable income.
Its heavy emphasis on consumable goods, which bring repeat purchases and represent almost 70 per cent of its total revenue, has served it well during the economic downturn, as people from higher income brackets than its traditional customer have been forced to tighten their belts and turned to Dollar General for daily necessities.
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Mirko Martich of AT Kearney, the consultancy, believes that “a significant chunk” of these newer, slightly more upmarket consumers are likely to stay, even once the American economic recovery is established. “Discount retailers are responding by broadening their product mix and making the shopping experience more pleasant,” he said.
Dollar General was publicly listed until July 2007, when it was taken private by affiliates of KKR for $7.3 billion. Before this deal, the company had been struggling and was burdened with excess stock. A new management team was put in place after KKR stepped in and a programme to slow expansion, close underperforming stores and revamp the merchandise mix is now largely complete.
KKR has itself just completed a listing on the Euronext exchange in Amsterdam, with plans to move to the New York Stock Exchange in spring 2010. In 2007 the firm helped to take buyout deals to an historic high, executing $250 billion of transactions over an 18-month stretch.
KKR is now lining up listings for several of its portfolio companies as it attempts to take advantage of the recent rally in global stock markets.
Zoe Tan, an analyst with Morningstar research, expects investor interest in today’s flotation to be high, but cautioned that Dollar General continued to face strong competition from other discounters.
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“While Dollar General possesses certain competitive advantages, we believe that it is difficult for the firm to consistently generate excess returns over its cost of capital, due to the lack of product differentiation, the myriad of substitutes available, and the low barriers to entry in the deep-discount space,” she said.
Ms Tan added that Dollar General was also more highly leveraged than many of its rivals, with long-term debt of $4.1 billion as of July.
The offering will help to make the fourth quarter of this year the busiest for US-listed IPOs since the first quarter of 2008, according to Dealogic, the data provider.