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With our DG obsession which began years ago at more than double today's quote, we now have the same price as 9 years ago, less of course given inflation. And I'll just take a wild stab and guess we have twice as many stores.

Maybe you should ask your for your subscription cost back.

dealraker: Your points are well (if somewhat repeatedly) taken as to this particular investment choice. So far, so bad.

And now for the follow-up question: assume you found yourself the disgruntled holder of DG shares. Rather than continuing to vociferate about your fate and casting blame what do you do now?

Do you sell the DG shares immediately or do you hold for a possible bounce? If you sell now, what do you do with the proceeds?

(thread should be marked OT or on a different board)

And I'll just take a wild stab and guess we have twice as many stores.

Yup, since the first time this price was seen around spring 2015, DG's store count is up from around 12900 to 20345.
Sales up from about $66/share to over $180/share, 11.7%/year compounded.

Until the profitability dip starting last year, in normal years net profit margin has usually been in the range 5.2% to 7.9%. There is some doubt that the old normal profitability range will be visited again, but if it were, that sales rate would put today's price at a cyclically adjusted trailing P/E of 5.8 to 8.8. A big "if", perhaps. The trailing P/E is 12.9 right now.

For comparison, Walmart's sales per share is up 5.0%/year in the last 10 years, profits up 3.0%/year, and currently trading at a trailing P/E over 40.
I made a whole lot on these guys when they were price attractively, but I don't see a margin of safety at these levels.

Jim
(long DG and DLTR)

I see the board has lit up about DG. I'm about £200 down on it. I only purchased for interest value to keep track. I spend a lot of time going through other investors portfolios to generate ideas, (rather than screeners) and then trying to figure out what the interest is. Some are obvious no brainers with a clear moat and attractive fundamentals and I'll take a sizeable position,

I couldn't figure out the attraction of DG in that respect so put it in the "too hard pile". As always do your own research and never shoot the messenger and take personal responsibility for your own investment decisions. DG reinforces this lesson.

I remain rather perplexed that this crew, of all groups in the world, has concluded that an investment is a total bust and was obviously a stupid idea primarily because the price is down after a year. Do folks give up that easily? Gosh. I mean, maybe that's right, maybe it's not, but (a) it's a pretty short term view of things, and (b) it's giving Mr Market a lot more credit that he is generally due.

I liked it at $151, and definitely at $115 when I called it a "buy" on my site, and I like it now despite it being in the scratch and dent bin. My central expectation of a rate of return is higher starting from here, offset by a now wider range of possible outcomes because of the recent problems which will be some unknowable mix of transient and lasting. There have been enough unpleasant surprises that it would be reasonable to reduce my price target, but it's still a long way above today's price.

As mentioned, the old usual range of net margin was 5.2% to 7.9%. Last four quarters came in at 3.56%. If they can get it merely back up to 4.6%, today's price is a CAPE under 10.

Jim

I remain rather perplexed that this crew, of all groups in the world, has concluded that an investment is a total bust and was obviously a stupid idea primarily because the price is down after a year. Do folks give up that easily?

I'd hesitate to draw conclusions based on what the most vocal minority post in a situation like this.

Such situations seem to bring out two main groups:

1) The "I told ya so's" group, ready to let the world know, and

2) The invested group, disheartened and licking wounds, who perhaps haven't fully passed judgment yet but have had their faith shaken about their investment choice.

The former have every incentive to be crow as they chest thump, but the latter not so much.

I remain rather perplexed that this crew, of all groups in the world, has concluded that an investment is a total bust and was obviously a stupid idea primarily because the price is down after a year. Do folks give up that easily?

That lead me to do a bit of googling:

"In terms of how long stocks stick around in a portfolio, the average investor holds shares for 5.5 months. This is according to an analysis of New York Stock Exchange (NYSE) data conducted by Reuters. The analysis also revealed that the average stock holding period has been trending shorter and shorter. In the 1950s, for instance, a typical investor held onto their shares for eight years on average."

It would seem that among a group which has become well off following a man whose values have not changed much since the '50's, who says the ideal holding period is "forever", that most would have some patience. I imagine most do. I spend half the year in northern New Mexico, where these stores are in every little town. They save a lot of driving. I don't see them going away. I'll sit tight and will be interested to watch how this one evolves.

And to follow up, one of Jim's I liked and have purchased is Hershey HSY 👍. It's only up about 7%, I've held it for a while but one that made sense to me.

who says the ideal holding period is "forever"

That is NOT what was said. What was said is "my favorite holding period is forever". The ideal holding period, on the other hand, is as long as the company is performing according to expectations.

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.

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

Anecdotal observations on Dollar Tree, Dollar General, and Family Dollar.

In all of the above, the prices are not any better than Walmart and often worse, the shopping experience is horrible. While WalMart has improved more than any retailer I know. The WMT stores are, dare I say, beautiful—something almost unimaginable a decade ago. They are consistently nicer than Target. And Target was positioned as an upscale WalMart. So much for that.

I looked into DG and spoke with employees. I asked about shrink—they both said their store is “robbed blind”. Nothing they can do about it, 1-3 employees on duty at any time. There are no resources for reducing theft, they don’t have ability to do it and are told not to attempt. Mind you, this store is an upper middle income extremely safe, low crime suburb of Boston. The Family Dollar went out of businesses here. The Dollar General and Dollar Tree get decent business—but it’s niche stuff only. You pick up batteries, or a greeting card ,or Armorall you need for a last minute project, etc. Even the poor customer prefers the vastly superior WMT experience for the bulk of their shopping.

Walmart has the resources through its scale to reduce theft. They have individuals at each store specifically assigned to such. The results, across the largest possible sample size, demonstrate progress. Walmart I’m certain serves more “poor people” than the Dollars combined. They’re also growing rapidly in the 6-figure category thanks to the $Billions spent on modernization. They’re safe, attractive and inexpensive. A proposition appreciated by the poor & rich alike. As their client mix now reveals.

Most importantly: I think the Dollar Stores have lost their moat. The moat was ultra low pricing, lots of stuff you can pick up close to home. Well, the in-store experience has just deteriorated in part because the cash that should have gone into refurbishment, capital REQUIRED for reinvestment, etc went to shareholders. That was never “free cash”. That’s part of the problem. It LOOKED like free cash. It was not. So it was a very temporary—arguably illusory moat.

And now these stores are essentially targets of the free product seeking, soft criminal poor and middle class. And not just in “rough neighborhoods”. This is a real problem and I don’t believe it’s temporary. The store I visited would probably have to increase its minuscule payroll by 25% to even attempt to patrol theft. In an environment in which the LARGEST percentage increase in pay since the Pandemic has gone to the LOWEST paid, least skilled workers (minimum wage no longer exists—$9/hr workers are now paid $16/hr. This is who works at DG. Figure those percentages). If your baseline is Dollar General employee pay—you’re getting killed with employee cost. And that low cost is/was essential to the business plan.

I think these stores are toast as an investment. Look, THIS economy is best-of-all-worlds for the Dollars: 5% nominal GDP with lower middle and middle strained by high prices. You should see a bifurcation that on the lower end is the ultimate Dollar Stores’ Sweet Spot. Where’s the migration?

The amount of money it will take to upgrade these stores, improve the experience, and combat shrink is massive. It can be done. But not with my capital. I wish you guys luck. I wouldn’t own WMT either btw. It’s a very expensive stock. And eventually the Dollars will spend the fortune it takes to compete. And eat into that pie.

Most shareholders will not win, customers will win fabulously. IOW, the history of Retail has not been repealed. Firmly in the “too tough” pile.

This thread is proof that all posts have value including the critical ones which often generate the most interesting discussion.

The initial post is by dealraker which to his credit is not nasty. The back-to-back posts by mungofitch and LongTermBRK are excellent and give the essence of the dollar store bull and bear cases. What more can a reader hope for in a thread!

The fact that this forum exists is nothing short of a miracle. The chances that someone would replicate Motley Fool were remote to non-existent. And yet, here we are! All of us have a collective responsibility to keep this good thing going for hopefully decades to come. All we have to do is maintain a civil tone.

The bulk of my net worth is in Berkshire and I sleep well at night. That would be not be possible without this board and it's prior version at the Fool. Although virtual and anonymous, it still feels like a family <-:)

If I may…

The “shrink” problem at DG and similar stores may be significant, to be sure. And it’s entirely possible that part of the cause is undermanned stores and/or the clientele that frequents them. But…

The National Retail Federation, which would be in a position to know says:

“ Across American retailers, average shrink—the industry term for inventory lost for any reason, expressed as a percentage of total sales—has remained relatively steady at around 1.5% for years, according to the National Retail Federation, a trade group that’s long lobbied for a more robust law enforcement response to retail theft. But shrink accounts for many types of things, including paperwork and checkout errors, losses in transit, returns, spoilage and theft from employees or vendors.

The quote is from the latest BusinessWeek, not available directly but through Apple News at:
https://apple.news/Azt0oKQCKSOyH_ezJGrNMaw

It’s a fascinating story, detailing how the “lock up” of products at CVS, Target, Walgreen’s etc is having a terrible effect on shopper and shopping, and driving people online by making the traditional shopping experience so terrible that there’s little option. Go ahead, try to find someone at one of the “big” stores to open one of those cases for you. But then, as you otherwise might, stand there and consider the product, compare it to others while the employee hovers over you while waiting to race to the next person who has worked the (frequently not working) “Need Help?” Button.

The story is better than I can describe here, but includes anecdotes of underwear being locked up on the 2nd floor of an urban Target (really? People are going to lift a carton of underwear, take it down the escalator and run out of the store? Underwear?) Or the $40 lotion being on the open shelf next to the $6 deodorant behind the locked plastic barrier?

But let me disagree with the idea that there’s no moat. The moat was (but may no longer be) the locations of Dollar Stores, DG, etc. They began rural, in food deserts or sundries deserts or wherever it was too remote to make running a WalMart (or especially a Target) worthwhile. It was really the 1990’s version of the 1890’s general store, a little of everything in bite size packages and hopefully cheap. WalMart couldn’t compete because WalMart wasn’t there . Or if it was there it was 15 miles away, and you have to park a 1/2 mile away and get lost wandering around the Noah’s Ark of retail.

The problem they have faced is the ease with which the stores can be placed - and the gold rush that led to tens of thousands of them being dropped everywhere, often right next to each other in the greatest example of parasite marketing gone awry.

In an over-retailed country it’s become an over-retailed segment. Some consolidation is in order, and in fact that is happening. More staffing isn’t going to happen, at least in significant numbers, and foolish initiatives like over-reliance on self-checkout without monitors (WalMart, Target, Kroger, etc. have a hairy eyeball monitor watching; DG doesn’t.) Reducing theft could be pretty trivial. Obvious video monitors for the aisles and elimination of unmonitored checkout would probably go a long way. More to the point, 2/3 of shrink happens before product ever hits the shelves. It’s the delivery, or the stock room, not the well-publicized but rare “retail theft gangs” we’ve all heard so much about. Even Walgreens and CVS admit they got too far out over the skis attributing the problem to that.

Lest this post get longer than War & Peace, I’ll just close by saying “Yes,” in the too tough pile for now. No, not insolvable. And I have yet to see a WalMart that’s anywhere near “better than a Target”.

The “shrink” problem at DG and similar stores may be significant, to be sure. And it’s entirely possible that part of the cause is undermanned stores and/or the clientele that frequents them. But…

The National Retail Federation, which would be in a position to know says:

“ Across American retailers, average shrink—the industry term for inventory lost for any reason, expressed as a percentage of total sales—has remained relatively steady at around 1.5% for years, according to the National Retail Federation, a trade group that’s long lobbied for a more robust law enforcement response to retail theft. But shrink accounts for many types of things, including paperwork and checkout errors, losses in transit, returns, spoilage and theft from employees or vendors.


Perhaps better to use the NRF's actual report, which shows a small increase in shrinkage last year (1.4% to 1.6%), rather than a second-hand article about that report that says that the number is 'relatively steady' at 1.5%.

From the NRF report (https://nrf.com/media-center/press-releases/shrink...):

As incidents of retail crime continue to escalate throughout the country, retailers have seen a dramatic jump in financial losses associated with theft. When taken as a percentage of total retail sales in 2022, shrink accounted for $112.1 billion in losses, up from $93.9 billion* in 2021, according to the 2023 National Retail Security Survey released today by the National Retail Federation.

“Retailers are seeing unprecedented levels of theft coupled with rampant crime in their stores, and the situation is only becoming more dire," said NRF Vice President for Asset Protection and Retail Operations David Johnston "Far beyond the financial impact of these crimes, the violence and concerns over safety continue to be the priority for all retailers, regardless of size or category.”


This supposedly small 1.5% problem is actually a pretty big percentage for many retailers with low margins, like DG. Walmart, for instance, has 2.4% margins after shrink, so I doubt they would think it is a minor problem. DG's margins were 4.3% last year, a bit better, but then, shrinkage is likely to be much higher than the industry average, which includes retailers like Costco and Apple that probably have minimal levels of shrink, and retailers like Walmart and Target that are almost certainly better equipped to minimize shrink.

This industry is going to get disrupted. Even paying ten times earnings is too much. Home delivery costs will soon start trending towards zero. The market these stores are serving is putting products into people's refrigerators or bathrooms ... not making them available for consumption in the stores. Better to take orders verbally or on the computer and then dispatch a delivery bot from the warehouse directly to the customer's home and stock their shelves than make the customer get "presentable", drive to a retail store, park their car, walk into the store, find the product, go through checkout, get back to their car, drive home and then put the TP on their own shelves. "Real world" AI is why NVDA is worth 3T.

Perhaps better to use the NRF's actual report, which shows a small increase in shrinkage last year (1.4% to 1.6%), rather than a second-hand article about that report that says that the number is 'relatively steady' at 1.5%.

Well, not to get too far into the weeds on this here on the Berkshire board (but I guess I am, aren’t I?), but the report is from 2022, right after what some call “the great shoplifting freak out” of 2021. A couple of things:

The data is suspect from the start. It represents replies from a mere 175 participants out of 16,000 members and 97,000 retail outlets in the country, and would - like other non—stratified non-randomized surveys - be susceptible to participant bias: that is, stores that think they’re getting shoplifted are more likely to respond than those which aren’t.

Second, the data was wrong, anyway, as even NRF admitted later:

Retail lobby group’s retraction of key crime claim shows how hard it is to track theft

The leading retail lobbying group has walked back a key claim about shrink, or inventory losses from various sources, after a news investigation revealed that the analysis was incorrect.

The Friday retraction from the National Retail Federation underscores just how difficult it is for the industry to accurately measure the impact and source of inventory losses, even as it uses that data to lobby lawmakers to pass stricter laws that crack down on theft.
https://www.cnbc.com/2023/12/07/us-retail-lobbyist...

Adding to the fire, even some CEOs who blamed poor results on “theft” have walked back their claims:

Maybe we cried too much’ over shoplifting, Walgreens executive says

Maybe we cried too much last year” about merchandise losses, Walgreens finance chief James Kehoe acknowledged Thursday on an earnings call. The company’s rate of shrink — merchandise losses due to theft, fraud, damages, mis-scanned items and other errors — fell from 3.5% of total sales last year to around 2.5% during its latest quarter.
https://www.cnn.com/2023/01/06/business/walgreens-...

DGs margins were 4.3% last year, a bit better, but then shrinkage is likely to be much higher than the industry average, which includes retailers like Costco and Apple that probably have minimal levels of shrink, ad retailers like Walmart and Target that are almost certainly better equipped to minimize shrink.

No doubt. But 2/3 of shrink is found in the storeroom and goods transport and fraudulent returns and such, not on the retail shelves, and all of those mentioned (Costco, Apple, WalMart, Target, etc.) are big enough to have people “watching” at the checkout. (Not at the shelf, typically). DG went so far as to have no one at the shelves, but also no one at the checkout, a recipe for fraud, no? That is fairly easily corrected, and if the 1/3 of the problem is so large, then some additional salary (and less capital for self checkout) would seem to be in order.

It’s worth noting that shrink *always* goes up during recessions or economic stress periods. I would think the high inflation/pandemic/shutdown would qualify, although there’s not a big history to draw from to support the conclusion.

Chart:
Inventory loss from theft and operational or other errors, known as “shrink,” has fluctuated little in 7 years
https://www.retaildive.com/news/retail-shrink-thef...

Finally, I’ll just leave with this. Target complained about shoplifting to the point of closing stores around San Francisco. And now they’re opening new stores —- wait for it — mere blocks away from the old ones. Maybe it wasn’t really the shoplifting, but poor execution, store design, or all the other factors that went into the Annual Report Excuse Random Generator?

However, it’s not clear the numbers add up.

For example, data released by the San Francisco Police Department does not support the explanation Walgreens gave that it was closing five stores because of organized retail theft, the San Francisco Chronicle reported in 2021.

One of the shuttered stores that closed had only seven reported shoplifting incidents in 2021 and a total of 23 since 2018, according to the newspaper. Overall, the five stores that closed had fewer than two recorded shoplifting incidents a month on average since 2018.

Similarly, a 2021 Los Angeles Times analysis of figures released by industry groups on losses due to organized retail crime found “there is reason to doubt the problem is anywhere near as large or widespread as they say.”

Don't attack the idea giver, attack the idea, that was missing from the poster.

I don't like the dollar tree or dollar general etc. because they are either in the sunset business or are too hard to predict its future and value.

In general, I and some traditional value investors have been making a mistake in putting much weight on past performance, not enough weight on the fast changing landscape because the Internet and technology have been and continue to change many business models.

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