Michigan Investment Banking Club Valuation of Dollar General - December 11th 2019

Michigan Investment Banking Club Valuation of Dollar General Team 4: Linda Chiu, Brian O Connor, Anshul Rana December 11th2019 MIBC

Agenda 1. Executive Summary 2. Company Overview 3. Industry Overview 4. Risks and Mitigants 5. Public Comparables 6. Precedent Transactions 7. Revenue Build 8. DCF Assumptions 9. Valuation 10.Conclusion 11. Appendix MIBC

Executive Summary Share Price Multiples Value and Convenience Proposition Business Model $153.55 EV/EBITDA: 19.43x Price/EPS: 25.72x Dollar General strives to deliver highly competitive prices on national and private-label products at convenient store locations Dollar General utilizes a low-cost operating model that focuses on growing a store base and continuing a profitable store growth strategy Representing a 1-year increase of 47.5% MIBC

Dollar General Company Overview Key Facts Key Financials Historical Stock Price (1 Year) 2016A 2017A 2018A 2019A Share Price (12/04/2019): $153.55 120 180 Total Revenue 20,368.6 21,986.6 23,471.0 25,625.0 7.7% 2019 2nd Quarter Earnings 100 160 7.9% 6.8% 9.2% % Growth 2018 4th Quarter Earnings $153.55 +47.5% 80 140 Shares Outstanding: 259,518,801 (as of March 2019) 6,306.1 6,782.6 7,221.4 7,803.9 Gross Profit 60 120 31.0% 30.8% 30.8% 30.5% $104.10 % Margin 40 100 2,298.6 2,449.7 2,419.8 2,574.5 EBITDA 20 80 Founded: 1939 11.3% 11.1% 10.3% 10.0% % Margin 0 Dec-18 60 Mar-19 Jun-19 Sep-19 Dec-19 Headquarters: Goodlettsville, Tennessee 1,946.2 2,069.7 2,015.6 2,120.4 EBIT Volume (in mm) Price Annotations 9.6% 9.4% 8.6% 8.3% % Margin Store Locations Firm Overview CEO: Todd J. Vasos Dollar General was publicly traded from 1968-2007, when it was acquired by KKR. It became publicly traded again Nov 2009 Dollar General has a market cap of $38.9b Merchandise consists of national and private brand products, priced at <$10 In 2018, achieved the 29thconsecutive year of positive same-store sales growth Consumables is the largest merchandise category, and makes up an increasing percentage of total sales Industry: Discount Retailer Segments: - Consumables - Seasonal - Home Products - Apparel Number of Locations: 15,472 MIBC

Industry Overview Key Drivers Industry Outlook Level of consumer disposable income is a key component for industry performance. The target consumer profile is lower-middle class workers, many of whom are heavily affected by changes in unemployment rates, wage rates, and healthcare and housing costs among other economic factors E-commerce and international retailers provide fierce incentive for innovation in cost, service, last-minute delivery, efficiency, and overall consumer experience Fear of recession contributes to increased growth and profitability for discount retailers until 2021 when experts predict the recession to end Retail apocalypse of 2017 and 2018 has ended, the number of bankruptcies is predicted to decrease in future years Private labels are predicted to grow in market share, increasing brand recognition and online visibility is key to profitability Competitors MIBC

Risks and Mitigants Risks Mitigants Low Income Class Shopping: Inability to increase prices due to the pressures on personal incomes. Dollar General relies on low income customers and communities to generate revenue Dollar General continues to gain market share because convenience of location means there are increases in number of customer visits. Carrying more private label products also allows Dollar General to cut prices against competitors like Walmart. Additionally, Dollar General has increased discounts to incentivize consumers Competition: Oversaturation of market as competitors seek to expand store base. The competitive landscape is fierce, including smaller, more nimble companies as well as larger multinational chains with significantly more resources. The environment increases the risk of needing to lower prices and contract margins in order to maintain market share Dollar General is better positioned than its competitors: Dollar Tree is still working to fully integrate Family Dollar, has taken a $2.7b write- down and will shut down up to 390 Family Dollar stores. Additionally, while other competitors target solely lower or middle class consumers, Dollar General targets both segments China: Dollar General has a supply chain reliance on sourcing from China and is subject to uncertainty over the US-China trade war Dollar General is steadily reducing reliance on China by incorporating more US suppliers in their supply chain. Any effects from the US-China trade war are not unique to Dollar General and will also influence other competitors in the industry MIBC

Public Comparables A brief look into the firm s main comparable companies Comparable Companies Company Dollar General Price $ 52 WK High $ 52 WK Low $ Enterprise Value Debt 50,604.90 $ EBITDA $ EBITDA Margin (%) EV/EBITDA 163.8% EPS Price/EPS 155.10 166.98 98.08 $ 2,865.00 2,604.20 19.43x 5.97 25.98x Average Median $ $ 72.61 74.48 $ $ 85.80 79.90 $ $ 50.88 49.03 $ $ 54,594.94 40,444.60 $ $ 2,411.87 518.60 $ $ 4,904.83 5,125.60 8.7% 8.8% 13.35x 11.51x 3.68 3.76 20.01x 17.86x Large Cap Dollar Tree Target Kroger CVS Health Walgreen's TJ Maxx Small Cap Big Lots Five Below PriceSmart $ $ $ $ $ $ 90.80 124.68 26.80 74.48 59.10 59.57 $ $ $ $ $ $ 119.71 127.97 30.40 78.06 83.57 61.69 $ $ $ $ $ $ 81.71 60.15 20.70 51.71 49.03 41.49 $ $ $ 31,164.00 76,091.00 40,444.60 179,360.00 $ 70,112.20 $ 81,648.60 $ $ $ $ $ $ $ 4,265.00 13,445.00 15.23 73.43 17.93 2,477.00 $ $ $ $ $ $ 2,238.40 6,611.00 5,365.00 16,771.00 7,155.00 5,125.60 9.8% 8.8% 4.4% 8.6% 5.2% 13.2% 13.92x 11.51x 7.54x 10.69x 9.80x 15.93x 7.21 5.39 3.76 -0.57 5.99 2.43 12.59x 23.13x 7.13x 9.87x 24.51x $ $ $ 19.16 124.20 74.70 $ $ $ 42.71 148.21 79.90 $ $ $ 18.54 86.57 48.06 $ $ $ 2,504.20 7,781.60 2,248.28 $ $ $ 518.60 799.53 95.11 $ $ $ 463.50 240.10 173.90 8.8% 14.1% 5.4% 5.40x 32.41x 12.93x 3.83 2.66 2.4 5.00x 46.69x 31.13x Industry Averages Min 1st Quartile Average Median 3rd Quartile Max EV/EBIT 12.45x 14.89x 20.18x 18.09x 24.31x 29.91x EB/EBITDA Price/EPS 6.47x 9.59x 14.24x 12.02x 17.99x 24.17x 6.07x 13.97x 21.53x 21.86x 31.02x 35.60x MIBC

Precedent Transactions Most Applicable Precedents Kroger/Harris Teeter Dollar Tree/Family Dollar Dollar Tree s acquisition of Family Dollar made them one of Harris Teeter has stores in affluent vacation destinations, the leading discount retailers back in 2014 university communities, and markets where populations Great synergies between the companies because of are growing faster than the U.S. average similarities in business models Helped Kroger in its battle for market share against Allowed them to target a much broader range of customers Walmart and more specifically, their direct competitor, Publix, its chief rival rival in the Southeast Ares/99 Cent United Natural Food/SuperValu Ares Private Equity Group seeks to acquire middle United Natural Foods sees opportunities for growth market companies with strong business franchises through the acquisition of Supervalu, allowing for Acquired 99 Cents Only due to its quality value and larger scale, more diverse business attractive merchandise, seeks to utilize its capital to The acquisition diversifies customer base, enables serve as a catalyst for 99 Cents Only s growth cross-selling opportunities, delivers significant synergies, and accelerates growth MIBC

Revenue Build Store Growth Method for Store Growth Method for Sales Growth Dollar General has been consistently opening stores over the past years and have released future store openings. Calculated Selling square ft. over sales per square foot for each historical year. Estimated a 1:2 correlation between selling square feet growth and proportion Estimated revenue growth/year based on analyst estimates, and Fiscal 3rdquarter earnings call citing store growth as the main revenue driver. Prioritize New Store Expansion Todd J. Vasos. Revenue Build Revenue Build FY2014 18,909,588 $ FY2015 20,368,562 $ FY2016 21,986,598 $ FY2017 23,470,967 $ FY2018 25,625,043 $ FY2019 27,675,046 $ FY2020 29,727,424 $ FY2021 32,131,683 $ FY2022 34,785,491 $ FY2023 37,410,545 $ FY2024 40,168,707 $ DG Sales (in thousands) Growth 7.7% 7.9% 6.8% 9.2% 8.0% 7.4% 7.9% 8.1% 7.4% 7.2% Selling Square Feet (in thousands at period end) Growth 87,205 92,477 6.0% 98,943 7.0% 107,821 9.0% 113,755 5.5% 120,499 5.9% 127,417 5.7% 135,032 6.0% 141,896 5.1% 148,617 4.7% 155,149 4.4% Sales Per Square Foot Growth $ 217 $ 220 1.6% $ 222 0.9% $ 218 $ 225 3.5% $ 230 2.0% $ 234 1.7% $ 238 1.9% $ 245 3.0% $ 252 2.7% $ 259 2.9% (2.0%) 402 420 4% 445 6% 495 11% 505 2% 525 4% 546 4% 567 4% 579 2% 590 2% 599 2% Proportion Selling sq ft/Sales sq ft Total Store Count Beginning of Year New Opening Closings Total Stores End of Year 11,132 11,789 12,483 13,320 1315 14,534 15,370 16,284 1000 17,219 1100 18,248 1000 19,175 20,083 700 43 730 36 900 63 900 64 975 61 975 67 950 67 101 65 71 72 11,789 12,483 13,320 14,534 15,370 16,284 17,219 18,248 19,175 20,083 20,966 Average Square Feet/Per Store 7,397 7,408 7,428 7,419 7,401 7,400 7,400 7,400 7,400 7,400 7,400 MIBC

DCF Assumptions Average EBITDA multiple of 14.24x, weighted according to comps enterprise values More and more people moving into the low income class until 2021, Dollar General keeps up store growth, but at a slowing rate Effective tax rate of 21% New federal tax rate Steady Depreciation and Amortization for the next five years Percentage of average percentage of Revenue has stayed relatively constant Rising Capital Expenditures over the next 5 years due to store expansion, until 2021 MIBC

Valuation Valuation Method Assumptions Overview Comparable Company Analysis Range of enterprise value is calculated through min/max of EV/EBITDA and EV/Sales multiples from comparable companies Used P/E ratio of comparable companies and diluted EPS of Dollar General. to estimate share price Comparable Companies include Dollar Tree, Precedent Transactions We used EV/EBITDA to generate enterprise value Comparable precedent transactions were gathered based on acquisitions in the retail industry Transactions include Discounted Cash Flow Analysis Using perpetuity growth method we had a long term growth rate of 1.5% and a WACC of 5.39% Revenues were taken from SEC filings and quarterly earnings reports, and projections were based on company 10k s and industry trends 52 WK High/Low $118.44 $155.73 Precedent Transactions $107.17 $147.23 Comparative Analysis $144.96 $205.96 DCF (Perpetuity Method) $133.16 $185.54 DCF (Multiple Method) $178.81 $192.22 $25.00 $75.00 $125.00 $175.00 $225.00 $275.00 Current Price: $153.55 MIBC

Conclusion Based on our model and market projects, Dollar General has an upside of 20.89% Our current price is $153.55, and our target price is $185.63 The discount retail industry is poised for growth in future years due to the probable impeding recession Dollar General s simple business model of focusing on store growth allows them to drive profitable sales growth, capture growth opportunities, enhance their position as a low-cost operator, and invest in people as a competitive advantage A possible acquirer for Dollar General is Target Target is currently competing against traditional brick-and-mortar stores such as Walmart, as well as new online giants such as Amazon Acquiring a discount store with a customer segment separate from Target s current customer base will help hedge against a coming recession MIBC

Appendix Target Price Calculation Sum of PV of FCFs EV/EBITDA Multiple WACC Target Price Calculation Sum of PV of FCFs WACC Growth Rate after 2024 Weighted Average Cost of Capital 8,118.66 14.24x 5.39% 8,118.66 5.39% 1.50% Equity Market Value of Equity % Equity $ 39,488.50 93.24% Terminal Value PV of Terminal Value Target EV Less: Debt Plus: Cash Equity Value Shares Outstanding Target Price Current Price Upside/(Downside) 56,055.09 40,918.12 49,036.78 2,865.00 235.49 46,407.26 250.00 185.63 153.55 20.89% Terminal Value PV of Terminal Value Target EV Less: Debt Plus: Cash Equity Value Shares Outstanding Target Price Current Price Upside/(Downside) 45,323.81 33,084.69 41,203.35 2,865.00 235.49 38,573.84 250.00 154.30 153.55 0.49% Risk Free Rate Beta 1.84% 0.61 Expected Return of Market Risk Free Rate Market Risk Premium 8% 1.84% 6.16% $ $ $ $ Cost of Equity (CAPM) 5.57% Debt Book Value of Debt % Debt $ 2,864.69 6.76% Cost of Debt Corporate Tax Rate After-Tax Cost of Debt 3.62% 21% 2.86% WACC 5.39% MIBC

Appendix WACC 4.39% 4.64% 4.89% 5.14% 5.39% 5.64% 5.89% 6.14% 6.39% 13.24x $ 183.09 $ 180.80 $ 178.54 $ 176.32 $ 174.13 $ 171.99 $ 169.87 $ 167.80 $165.75 13.49x $ 186.14 $ 183.80 $ 181.50 $ 179.23 $ 177.01 $ 174.82 $ 172.67 $ 170.55 $168.47 13.74x $ 189.18 $ 186.80 $ 184.45 $ 182.15 $ 179.88 $ 177.65 $ 175.46 $ 173.30 $171.18 13.99x $ 192.22 $ 189.80 $ 187.41 $ 185.06 $ 182.76 $ 180.49 $ 178.25 $ 176.06 $173.90 Terminal Multiple 14.24x $ 195.26 $ 192.80 $ 190.37 $ 187.98 $ 185.63 $ 183.32 $ 181.05 $ 178.81 $176.61 14.49x $ 198.31 $ 195.79 $ 193.32 $ 190.89 $ 188.50 $ 186.15 $ 183.84 $ 181.56 $179.33 14.74x $ 201.35 $ 198.79 $ 196.28 $ 193.81 $ 191.38 $ 188.98 $ 186.63 $ 184.32 $182.04 14.99x $ 204.39 $ 201.79 $ 199.24 $ 196.72 $ 194.25 $ 191.82 $ 189.43 $ 187.07 $184.76 15.24x $ 207.44 $ 204.79 $ 202.19 $ 199.64 $ 197.12 $ 194.65 $ 192.22 $ 189.83 $187.47 WACC 4.39% 4.64% 4.89% 5.14% 5.39% 5.64% 5.89% 6.14% 6.39% 0.50% $ 152.99 $ 145.07 $ 138.05 $ 131.79 $ 126.17 $ 121.10 $ 116.50 $ 112.31 $ 108.47 0.75% $ 162.35 $ 153.32 $ 145.38 $ 138.34 $ 132.07 $ 126.43 $ 121.35 $ 116.73 $ 112.53 1.00% $ 173.09 $ 162.70 $ 153.64 $ 145.68 $ 138.63 $ 132.34 $ 126.69 $ 121.59 $ 116.97 1.25% $ 185.54 $ 173.46 $ 163.05 $ 153.97 $ 145.99 $ 138.92 $ 132.61 $ 126.95 $ 121.84 Growth Rate 1.50% $ 200.15 $ 185.94 $ 173.84 $ 163.39 $ 154.30 $ 146.30 $ 139.21 $ 132.89 $ 127.21 1.75% $ 217.53 $ 200.59 $ 186.35 $ 174.21 $ 163.74 $ 154.62 $ 146.60 $ 139.50 $ 133.16 2.00% $ 238.55 $ 218.01 $ 201.03 $ 186.75 $ 174.59 $ 164.09 $ 154.95 $ 146.91 $ 139.79 2.25% $ 264.49 $ 239.08 $ 218.49 $ 201.47 $ 187.16 $ 174.96 $ 164.44 $ 155.27 $ 147.22 2.50% $ 297.31 $ 265.09 $ 239.61 $ 218.97 $ 201.91 $ 187.56 $ 175.33 $ 164.79 $ 155.60 MIBC