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Stocks A to Z / Stocks B / Berkshire Hathaway (BRK.A)
No. of Recommendations: 5
A couple of articles out on Dollar General:
https://www.fool.com/investing/2023/08/10/trading-...Reports on McDonald's CEO Christopher Kempczinski stating they've seen a trend of higher income households trading down from full service restaurants to fast food, and suggests Dollar General might see a similar effect in their upcoming earnings release.
https://seekingalpha.com/article/4626858-dollar-ge...Compares Dollar General to its "less profitable" and "less efficient" competitor Dollar Tree. It includes a conclusion that only 10.29% of the current share price of Dollar General is attributed to growth while 51.22% of the current share price of Dollar Tree is attributed to growth. The author doesn't explain why falling same store sales for Dollar General in Q1 isn't something to worry about - that seems to be what cause the large stock drop this year.
No. of Recommendations: 18
Compares Dollar General to its "less profitable" and "less efficient" competitor Dollar Tree. It includes a conclusion that only 10.29% of the current share price of Dollar General is attributed to growth while 51.22% of the current share price of Dollar Tree is attributed to growth. The author doesn't explain why falling same store sales for Dollar General in Q1 isn't something to worry about - that seems to be what cause the large stock drop this year.
I speculate that the drop was more a reaction to the sharply reduced guidance for 2023 net income.
But whatever. The market does what the market does.
As for the Dollar Tree comparison, the big thing about Dollar Tree is that the two (DLTR and DG) were historically both similarly very well run and very profitable, maybe DG a hair better, maybe not.
Then in 2015 Dollar Tree decided to make a big acquisition, Family Dollar, which was not a very efficient operator.
Their theory was that the Dollar Tree management/style would bring the economics of the Family Dollar stores up near the Dollar Tree level.
Long story short, it didn't work. The acquired stores have not improved all that much. Many were closed, and then a big write-off was taken.
You know the image of the pig in a python? Picture a mildly poisonous pig.
I think Dollar Tree has had a long slow hangover from that, but it does seem to be passing. And, the original part that was NOT the acquisition is still very profitable.
The surprising thing is that Dollar Tree is (as mentioned) getting the relative valuation premium at the moment, which doesn't really make much sense, as DG isn't the one who ate the poison pig.
As for the Q1 comps, that by itself is not a big worry for me.
These are generally wonderfully profitable businesses with great balance sheets, and they tend to breeze through recessions.
As far as I can tell their main risk exposure right now is higher real wage bills, and secondarily, that inflation isn't hitting everything at the same time so margins could hit a few transient bumps.
Their interest bill will rise a bit, as with most firms, but debt is not very big (equal to only about 3 years of net profits).
Overall, it seems to me unlikely in the extreme that profits won't be higher in a couple of years, and higher again a few years after that.
If you want to know whether they're good investments, the thing you probably have to assess is the likelihood that the revenue per share growth rate will stay substantial.
Ponder store count growth, real revenue per store, footfall and average ticket, multiple selling prices, the rising mix of low-margin consumables for traffic vs high-margin hard goods for gravy.
(revenue per share has been 13-14%/year in the last 5-10 years. Value Line predicts a slowdown to 6.5%/year in the next 3-5 years, though I'm not clear why such a sharp downshift)
With any decent sales growth rate, their businesses will support high earnings growth even with a bit of moderation in net margins should wages each more of the top line.
There seems always to be room for one more dollar store, so they haven't hit the limits of growth.
Though I have made most of my dollar store money historically on DLTR, DG is currently a pretty big position for me.
I have lightened up a pinch on Berkshire lately, and the thought has occurred to me to add a bit to the DG...maybe. Thinkin'.
Jim
No. of Recommendations: 1
Time for a lengthy discussion on return on equity or how over-valued the S and P is!
No. of Recommendations: 0
Wow!
No. of Recommendations: 1
No. of Recommendations: 34
FWD PE 18 shrinking margins, higher debt service, should perhaps cut dividend to focus on debt service. $12 EPS by 26/27?
https://youtu.be/MlKDkOckm0c?si=kKg-RAntEmlfau43 Certainly more rational thinking than you usually see.
But I think his model for the next few years would be improved by making it more internally self consistent.
I did not delve into it that clearly, as the spreadsheets flow buy quickly in the video, but it seemed to me that---
* He assumes a very slow rate of growth of stores, maybe 40-45% of the usual rate, but does not touch on where the freed-up money will go. He doesn't allocate it to debt reduction, the expense of which he holds constant at a new higher rate. I think expansion capex is around $750m/year from memory.
* For his terminal value, he knocks off the debt and looks at the earnings in relation to the remainder, but does not adjust the earnings for the $400m/year in interest charges saved if that debt were paid off.
You either get the benefits and expenses of having debt, or neither. There is no planned liquidation of the firm that would require paying it off, so this is an EPV valuation not a net asset valuation.
Though I am not a dividend seeker, I really don't get where he's coming from on suggesting that the dividend needs to be cut.
I think the great majority of shareholders would be better off if that money were used for buybacks, but it certainly doesn't seem to be in peril.
The payout ratio is around 1/3 during a cyclical dip in earnings, and maybe 25% of cyclically adjusted earnings. Tons of firms aim at 50%, many higher.
I think the dividend exists not as a goal to attract more investors but more as a "what else are we going to do with all that money rolling in".
It's a whole lot of work to open 1000 stores a year in an intelligent manner, so more expansion capex probably isn't viable, and historically the valuation multiples were usually pretty high so buybacks weren't a slam dunk choice.
Jim
No. of Recommendations: 7
So far today, S&P down -0.8%, DG up +0.62%.
Meaningless, but hey, when was the last time there was anything pleasant about this one? I take my joy where I can get it.
Jim
No. of Recommendations: 7
No. of Recommendations: 3
Thanks, great video.
Apart from Berkshire currently 60pct) and one other, I tend to keep my positions in a given stock below 4pct but I still believe DG's business model is intact and at usd 123 I think pessimism is way overblown. They are profitable and still growing, expected to open 990 store in 2023 with decent ROIC.
I will likely be adding up to 8pct of my portfolio, provided no major rebound
No. of Recommendations: 6
Interesting video which is balanced and also discusses the negatives.
It reminds me of two books I read many years ago "Made in America" and the Walmart Effect" about of course Walmart and their rural infill strategy etc etc.
Interesting points are the closing down of smaller locally run stores (that had survived Walmart),
And other points
crime increase, theft, lower wages, staff turnover, areas already saturated with Dollar Stores resisting more and other rural communities resisting them.
Added to this consumer pinched wallets
Some random thoughts;
One
In an area where they were the only store supplying 367 people and other areas saturated by 70 Dollar stores in 10 miles (Atlanta) and
With already thin margins are they vulnerable if things slip just a little eg recent earnings and management update.
The fixed costs for the rural store with employees and rent was $1000 per day. Multiply that across the portfolio with margin pressure with the issues they're facing and that causes me concern. In the saturated areas similarly there's the same issues but with intense competition.
Two.
Given the saturation already and the stories about resistance from areas plus the drop off in economics of the business model, mixed with debt service is this a perfect storm and have things peaked? Are we set for a period of much lower growth and stagnation in earnings growth.
No. of Recommendations: 2
No. of Recommendations: 1
Lidl and Aldi like McDonald's own their own freeholds making them essentially massive property companies too, what percentage of the Dollar General portfolio is owned freehold by DG?
No. of Recommendations: 4
Given the saturation already...
Anecdotal...went to get my kid from an event the other day and counted the Dollar General stores I passed on the 15-minute drive. I counted 4. And this is hardly a food desert. We have Costco, Sams, Wal Marts, Krogers, Targets, Meijer and a new Aldi (in half an old Kroger building, the other half is to be a shooting range).
Mrs.C is the shopper. She won't set foot in a DG. Occasionally looks for some item at DLTR or WMT. Normally shops at Kroger and Target. Surprisingly, likes the new Aldi.
On a recent trip to Montreal, I came across an Alimentation Couche-Tard convenience store while out walking. It looked dirty and a bit scary and I didn't go in.
I got gas at our local Circle-K once. The new Kroger gas station across the street is cheaper.
Retail is a funny business.
No. of Recommendations: 1
If you watch the video they mention that in Atlanta there are lots of food desserts where people who don't own cars need to walk to a store, they are also of the lower socioeconomic group and would not shop at a regular supermarket eg Costco / Walmart as they want smaller basket sizes and will not do a full weekly shop.
This explains the prevalence.
No. of Recommendations: 4
No. of Recommendations: 1
Anecdotally - the DG stores in Eastern North Carolina have started selling beer. This is new for the area, and probably reflects changes in local law only, but probably increases the distance certain shoppers might be willing to walk - LOL.
Smufty
No. of Recommendations: 2
Getting close to the $115 level now. Someone suggested it might bounce like Meta, I doubt it. I think it"ll "hang around" for a while.
No. of Recommendations: 4
I actually think DG is a cigar butt business. I don't know what's the stickiness that keeps customers coming. Shopping habit is not a unshakable trait. But I had been wrong on so many great businesses that I may take a dip if the price is very low (not now).
No. of Recommendations: 8
If you drive around in the south-east US a lot, you see a lot of small towns where there is a gas station and a DG or DLTR. And nothing else. Shopping there isn't so much a habit as a necessity.
No. of Recommendations: 0
<If you drive around in the south-east US a lot, you see a lot of small towns where there is a gas station and a DG or DLTR. And nothing else. Shopping there isn't so much a habit as a necessity.>
I believe that's a necessity. Then there're questions: what's the percentage of DG's profit come from such areas? How long will these areas stay unchanged given new immigration and population growth. If it's a good business in these areas, why wouldn't unmanned stores like Amazon-GO become a serious threat?
No. of Recommendations: 9
Shopping there isn't so much a habit as a necessity.
That's certainly the case for the few near the lake where we spend some time. I counted 9 stores in a 20 mile radius around the lake recently when looking on google maps.
I think most of their current issues are related to difficulty finding people willing to take store associate jobs and too much inventory.
We stopped by the DG closest to our place back in July during the middle of the day on an holiday weekend and it was closed. Came back by a few hours later and it was open. Seemed like they just didn't have the staff to keep it open that day.
Last weekend I stopped by the same store around 11am to buy a single $2 item. I went to check out and no one was at the register and the self checkout station wasn't working. I waited 2-3mins and the lone associate working the store that day eventually came to the register and checked me out. I think they have been running that location with a single associate during all shifts the entire summer because I don't recall seeing more than one any time I was there. That doesn't seem sustainable nor does it seem good for slippage and general merchandising of the store.
Jeff
No. of Recommendations: 8
Dollar General fills a convenience niche, it has a lot of stores scattered mostly in rural or suburban areas and meets the core essential grocery needs. A MD daughter likes living on a lake in a rural setting. Working long hours she prefers shopping at a DG store to going out of her way to one of the larger chains. One of the charities came out with an essential low income charity food basket list. She bought all the items in a basket from Publix (most expensive), Winn Dixie, Walmart, Aldi and DG. For this example DG and Aldi were the lowest price. She did say that they had a lot of low-price low-quality items.
In our area Aldi appears to be the big DG competitor. Typical DG stores are ~7,200 sq ft, Aldi stores are larger ~16,400, larger than DG but smaller than the Publix and Winn Dixi. But Aldi has just bought 400 of the Winn Dixie & Harvey Groceries stores to take advantage of a larger more efficient distribution system.
Best I can tell DG has been very aggressive at trying to keep employee wages low. Spend a little time browsing the web observing what DG and Aldi employees have to say about their pay and benefits. In every category employees of Aldi say they are better off than employees of DG. A company can't be profitable and overpay the competition but I have seldom seen such a large difference in employee sentiment.
My current two cents; Despite the problems I still believe Jim was correct, it has a profitable niche and is undervalued.
RAM
No. of Recommendations: 3
The Morningstar bunch on DG, a full recovery of profit margin expected:
More positively, we don't view current pressure as an appropriate bellwether for Dollar General's longterm prospects. The firm's core customers, who live in rural areas and make less than $40,000 per year,
are feeling a disproportionate share of current macroeconomic pressure and some pullback in demand
should have been expected. With labor and rental costs set at least in part by the broader market, it's no
surprise to see sharp operating deleverage in hindsight, and we expect a full recovery to high-singledigit margins as macro pressure abates.
No. of Recommendations: 1
And a slightly less postivie, but still price gain from here, from Wells:
'24 Recovery May be Weaker Than Expected; Remain on the Sidelines: The fact that
earnings risk seems low is important, and we are tempted by the stock here, but key
questions remain since we are not convinced the pivot was decisive enough. There are
one-time issues in the '23 guidance, but there are also growth challenges ahead (weak
comps, continued labor pressure, no share repo). We now see fair value at $145 (down
from $165), about 17x our $8.50 2024 estimate. Remain Equal Weight.
No. of Recommendations: 0
Morningstar now has DG at 5* rating. RARE.
Too big of a discount to Fair Value.
No. of Recommendations: 4
I'm curious if there's any appetite on BRK's part to re-initiate a position in DG. Back in 2011 - 2012, Brk turned a quick profit on the stock, with a position minor enough to suggest it was T & T.
I'm not sure why they exited, but it was a relatively well timed series of trades:
https://stockcircle.com/portfolio/warren-buffett/d....
No. of Recommendations: 0
Bloomstran mentioned the DG moat. Has he written about this anywhere? Please link.
No. of Recommendations: 2
No. of Recommendations: 0
MOAT*
No. of Recommendations: 0
Not convinced he's done that well on these dollar investments. He was projecting DLTR at $200 a share and it's now 110 and has been accumulating DG over recent years at much higher prices. 2022 and 2023.
No. of Recommendations: 1
Bloomstran mentioned the DG moat.
Was riding my bike along the "Longest Rail-Trail in Indiana" on Saturday. It crossed a road on the outskirts of a small town.
Right on that road in sight of the trail was a Dollar General, Dollar Tree and Family Dollar, a liquor store and gas station.
No moat there (in my sample size of 1). Just thought it amusing.
No. of Recommendations: 5
No. of Recommendations: 5
I bought it all the way down, in smaller chunks as I watched in dismay as it looked for a bottom. Now nearly all (but not all!) my purchases are above water and I’m wondering if I should trim back. I understand there is the possibility of some impressive results as they scale back on expansion. Any thoughts from those who follow it more attentively?
No. of Recommendations: 8
My position is up about 45% since I bought it and it still seems like there is potential for more. It depends on whether there is visible signs that its challenges are getting resolved, which so far has been a mixed bag. So I think of most of this gain as correction of an unfairly low valuation multiple rather than because of the kind of business turnaround that I had been hoping for. If they continue to show continued progress on the bits they have shown so far, I think there should be an opportunity to double this gain. So I am generally planning to hold for at least 1 year (another 6 months) before I revisit the thesis.
No. of Recommendations: 0
Looked like a compounder (LTBH) before it hit trouble, more of a 50-100% gain value play and sell IMO. Still have mine from 115 it's only small so I'll just hold on to it for the time being.
No. of Recommendations: 1
“So I think of most of this gain as correction of an unfairly low valuation multiple rather than because of the kind of business turnaround that I had been hoping for. If they continue to show continued progress on the bits they have shown so far, I think there should be an opportunity to double this gain. So I am generally planning to hold for at least 1 year (another 6 months) before I revisit the thesis.”
This summarizes my thoughts as well (small position). Funny, my stock lots are net up 1%, Jan. ‘25 100 calls are down 15% & Jan ‘26 85 calls are up 95%. Watching and waiting for now.
