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
