No. of Recommendations: 19
The question is whether the current weak stretch is just another cycle, or the harbinger of ultimate doom. If this is truly the end of the line for their business model, then yes, it could be a poor investment and I could lose quite a lot of money. We'll see. But I don't think they're in danger of going under, as they still make a nice profit every single quarter. Round numbers, $1-2 per share per quarter. It's quite hard to go broke so long as that sort of thing keeps happening even in weak stretches.
If it's NOT the end of the line, and margins can get even part way back to the old norm, they do look pretty attractive...the low share price is good news (good forward returns more likely), not bad news. Sales per share these days are 2.9 times as high as the first time they were trading at this price around mid 2015...
The general weather situation remains unchanged: I haven't made any money on DG lately, though a desperate optimist would note that it's doing better than the average S&P 500 stock in the last three weeks. But I thought I would re-post some comments I made at the Berkshire board, since this is a DG thread, on the subject of WHY DG and Dollar Tree have had this weak stretch. Guessing whether or not it will end requires first that you guess why it happened in the first place.
The shoplifting narrative have been greatly overpushed, methinks. For one thing, shoplifting and organized retail crime still account for only around a third of shrink--most of the problem is internal. Across US retail, aggregate shrink is barely above levels before the pandemic. The median retailer figure went from 1.2% in 2016 to 1.4% in 2022. Woo! I think the story has some truth, but I also think the discount retailers have been overhyping it to place blame one someone, anyone.
There is one under-reported narrative, however: overseas competition.
The market share of Temu among discount shopping (low income households) has gone from nothing to 17% since 2022. In the same measure and same time frame, the market share of DG fell from 63% to 52%, and Dollar Tree fell from 25.5% to 19.5%, a drop of 15% between the two of them. It's a different kind of shopping for household goods or clothes or toys, but it's coming from the same pool of shopping money, so the striking symmetry of the market share changes seems unlikely to be purely a coincidence. This may be another reason the dollar store bosses have been pushing for a higher mix of consumables: few people buy groceries drop shipped by slow boat from China.
If this view does have some meaningful explanatory power, then the recent announcement of intent to eliminate (or even reduce) the $800 duty- and tax-free "de minimis" exemption of small imports is VERY good news for the bricks and mortar discount sellers: the dollar stores. The tariffs aren't great, but (a) only a fraction of the discount inventory is imported and subject to duties, and (b) the buying power is largely restored by the recent rise in the US dollar.
Jim
