No. of Recommendations: 33
I think that in this context the thing to remember is that DG stores are *heavily* concentrated in tiny/rural locations.
Consequently I think the biggest effect we're seeing is that the people for whom this is the closest store, or the only store within reasonable distance, are struggling financially. At the very least, this seems clearly to be the reason that the stuff that is selling has had a huge recent skew towards consumables: DG's food and "food" offerings are cheaper than food elsewhere, and spending on durables can wait. It's not because DG management made a bone-headed decision to push low margin consumables: the clients are making that choice. Seen that way, the competition isn't Walmart, the competition is "not spending that money". Or not having that money to spend.
As a result I think the biggest question hanging over DG's head about the speed and magnitude of their return to something like their historical trajectory is the extent to which one views the struggles of this population as a cyclical problem. If it's just because the US is headed into a garden variety recession, it's not that big a deal. If there are stronger structural issues, like depopulation and the decline of viable business niches in small town areas, it could be a bigger long term problem.
No matter which of those is true, I remain optimistic. I think the current price ($113.81) represents something either very good or outstanding as an investment prospect. I anticipate solidly double digit returns over a variety of time frames starting here.
Of course, I might be nuts.
I mentioned yet one more bad way to come at it at mungofitch.com. The post looks at price-to-sales ratio which has the implicit built in assumptions of at least some mean reversion of both net margins and market multiples.
Jim
