No. of Recommendations: 13
I'm bullish, and every so slightly more so after the CEO changeup. In his short tenure, Owen made apparent mistakes (see, e.g., repeated failures on guidance); he appeared to be unwilling or unable to address the comps issue & changing customer behavior until very late in the game (see inventory); and he otherwise appeared overwhelmed and prone to platitudes/corporate speak. The Board and Vasos own some of this problem, it was their guy, but the negative was on them before the change. I think Vasos is capable, if not perfect.
I also prefer a Board that does not dither on a problem -- Owen very likely wasn't the answer, nothing in his performance as CEO suggested he was, and better to remedy the issue sooner than later. Would DG have been fine with him in the role? I think so. But Vasos strikes me as an upgrade, despite the cost.
Regardless, all of this strikes me as obsessing with the trees rather than the forest. A new substack makes the buy case better than I:
https://pyrrhusvalue.substack.com/p/dollar-generalA small snippet:
Of course naively extrapolating the past can't be everything. Market and companies change. But when you see a long period of stability and customer behavior, it has to be weighted. What I currently see in the stock is near 100% weighting of the specifics of the recent past with very limited weighting of the base rate.
I start with these points to have more perspective on the longer term in the business being a good one if purchased at an attractive price. They have a moat that hasn't changed because Walmart is investing in Ecom or comps have underperformed the last few quarters or inventory is (way) too high or management is (Maybe?) partly in denial or slow to respond on the issues.
[...]
At the end of the day only a few things matter for returns to be 10% or better
1. Can they open new stores for at least five years (and comp sales not persistently negative)
2. Are EBIT margins going to be above 7%
3. Will it trade at least at 13x earnings
More importantly to me, to lose money you'd need to believe
1. They never open another store
2. EBIT margins are 6% or below
3. It trades at 11x or less
It'd lean towards mid-teens returns through a combination of 5% sales growth, 8% EBIT margins, 3% share reduction, and trading at 15x earnings.
That's the upshot. The piece is well worth the read.
