No. of Recommendations: 25
Why is DG a good business to own to begin with? Because there is a captive customer group who have to count their nickels and dimes? Is there an exceptionally strong growth prospect? Ignorable debt level and high ROE? Unassailable moat? It’s in my I-don’t-dig-it pile ‘cause I don’t see it as a good long forever holding.
In a word, yes, they have those good things, as far as I can tell. Others may disagree.
Ten year averages at Dollar General:
ROE: 28.0% (vs about 18% expected in the current bad year)
Sales/share growth: 13.0%/year
Cash flow/share growth: 13.5%/year
EPS growth: 13.0%/year
Dividend growth: 12.0%/year (9 year rate)
Share count: -3.16%/year
That's a very impressive set of numbers.
The moat is not obvious till you delve further into the industry. I was a PE investor in a small chain for a while and got some good insights. It's a mix of scale and the purchasing/supply chain, which is very hard to get right, as well as strategic very local location picking. These are difficult enough that mom-and-pop operations and small chains just can't do what they do, and (until recently anyway) Walmart couldn't touch them, or even catch them. It's a business that is extremely easy to understand, but very hard to get into.
There are a couple of bonus items: no customer concentration or getting stiffed on bad receivables. But mainly the business just generates so much cash that usually their biggest problem is what to do with it all. They normally sail right through recessions, since some people have little choice but to shop there.
DG's "headline" debt is quite low, at around 3 years of typical net profits. When you adjust it upwards for the non-current portion of the operating leases, it's still quite reasonable at 7.5 years give or take. (I consider under 5 years low, and 5-10 perfectly acceptable for businesses with unusually reliable streams of earnings, which I think applies here).
As mentioned repeatedly, the issue right now is the recent bad results, assessing what's transient and what's permanent. I do not dismiss these concerns. But, given the history, and my experiences over the last 20 years, I remain optimistic that the problems seem to be in the price.
The only reason DG and DLTR aren't in my personal "forever pile" as you put it is that their valuations are famously cyclical. In any given 2-3 year period there is usually a stretch that they go way out of fashion and get very cheap, and another stretch that they get to bubbly/lofty valuation levels, so I like trading in and out. Buy 'em cheap, wait, sell 'em dear, repeat. There is no reason anybody has to take advantage of this effect, but it suits my style. The only thing to remember is that a low price does not by itself mean a company is going bust.
I haven't talked about downsides and risks, but I think the are generally dominated by the things mentioned above.
Dollarama in Canada might be an even better business. They're worth reading about. But the cyclical pricing effect isn't true for them: except for a jagged stretch for a couple of years ending in the pandemic low, the price has just gone up and they don't generally get conventionally cheap. My wife is a big fan as a client.
Jim
