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Dollar General at $123. Dividend yield a hair under 2%.

I like DG. It seems nobody else does.
One of my only two blog posts : ) https://mungofitch.com/

I mention it now because of a rarity: the stock price has been doing terribly for a long time, but for the last week it has been doing a bit better than the average large cap. Eventually there may be a bottom in the price cycle, and it would look like this at the beginning, so hey, it could be a good entry.

I am underwater, but I don't worry about that too much. These companies have a very long history of very wild price swings every couple of years, which is one reason I like jumping in and out of them cyclically, so this may just be another one. One should never take merely a low price as a sign that something is truly and permanently wrong, especially in this group. If there are other reasons to think there is serious trouble, well, that's a different story.

It is my hopeful expectation that they will return to a profitability level somewhat similar to the old norm, and that it will be a good investment from here. I even have a price target, $220, with (alas) no associated time frame. Soon enough that the annualized rate of return will be interesting. Say, earnings $10-12 on a multiple of 18-21?? Maybe I'm wrong, but hey, at least I'm calling my shots. It's one of my largest positions.

Jim

for the last week it has been doing a bit better than the average large cap

https://discussion.fool.com/t/well-ot-not-a-table-...

DG was a “reasonably buy” at $192.43 back in Feb ’22. It probably is finally a table pounder now?

Over the period, while DG dropped 37% to $121.59 S&P 500 went up 23% and the “expansive” Apple went up 31%. It only makes senses for the return to benchmark to a corresponding index, I suppose.

Well well, I guess KMX is starting to look up too.

DG was a “reasonably buy” at $192.43 back in Feb ’22. It probably is finally a table pounder now?

Well, that does presuppose that there has been no change to the business. They are definitely going through a rough patch. EPS was about $7 in the last four quarters rather than the roughly $11 that might otherwise have been expected. (it also presupposes that my old post had some merit!)

The question is whether the currently lower profitability patch is transient, mostly transient, or permanent. I am going for "mostly transient".

Their net profit margins were around 6.2% after the TCJA tax cuts but before the pandemic bump. This year is looking more like 3.9%. I perhaps optimistically expect to see numbers over 5.5% soon enough. Sales per share continues its happy march, so that kind of rebound would be very good for earnings...and presumably the price.

Jim

“The question is whether the currently lower profitability patch is transient, mostly transient, or permanent. I am going for "mostly transient".”

Hope you are right! I own a bit as well, mainly DITM DG LEAPS from last Summer. Appreciate your updated thoughts!

Will you share any thoughts on FIVE? Tilson wrote about it recently. Their long-standing CEO left last month, lots of operational issues with too much >$5 and slower turning inventory, inflationary effects, weakening U.S. low-mid consumer, missing #s & lower guidance, downgrades & now paying four senior execs $1.5M each retention bonuses to stay on board. Yikes- ugly all around! But the occasional times we’ve been there with the kids, they seem pretty busy with a pretty good store location wrt traffic (although often around the holidays). Shrink, staff turnover & suboptimal wages, competitors- for sure, but hope these are fixable with proper senior mgt and policies. Stock is off nearly 70% it’s 52 week & back down to its 2020 share price dip, PE is now 13(was over 50), Mkt Cap now 3.8B. From Yahoo Finance news recently:

“Five Below Inc (NASDAQ:FIVE) has decreased its second-quarter EPS outlook to $0.53 to $0.56, from $0.57 to $0.69.

Gordon Haskett also downgraded the stock, saying in hindsight the company’s decision to start selling items priced above $5 was wrong.

Five Below Inc (NASDAQ:FIVE) has been seeing a decline in comparable sales. The company recently said sales for the 10 weeks ending July 13 rose 9.5% year over year. But this was mostly due to new store openings. Comparable sales in the period fell 5% year over year, while the company expects a further decline of 6% to 7% in comparable store sales for the second quarter. Five Below Inc (NASDAQ:FIVE) short-term expectations are bleak, to say the least. For the second quarter, the company expects sales between $820 million and $826 million, 8.4% higher than last year’s $759 million but below analysts’ expectations of $839.8 million. Earnings per share are projected at $0.53 to $0.56, down from $0.84 last year and missing analysts’ forecast of $0.65. Net income is expected to be $29.3 million to $30.9 million, short of the anticipated $35.9 million.“

Will you share any thoughts on FIVE?

I have never studied them, so I can't comment. Most of my reading has been on Dollar General, Dollar Tree, or (Canadian) Dollarama.
Some of my insights come from having been a private investor in the business, and insights from the management of that firm. They didn't pass me comments on Five, so I can't pass them along!

Very short precis of my own thoughts--
As of a few years back when I decided to start investing in the public ones, Dollar Tree was considered to be the best merchandiser among the big US players, per my contact's advice. I did well on them many times, as the prices in this sector are very cylical. Then they did a big acquisition at a fairly good price, hoping the poor economics of the acquired stores would converge on the good economics of their existing ones...but it didn't work. The stock price spent some years in the weeds...I did OK, but not outstandingly, at that time as it seemed like there was a free upside to be had if the convergence theory ever worked out.

Since then and until just recently DG has been the better operator: no big acquisition stumble, so all their metrics and their stock price and multiples held up. When they finally, and in a rare move, got relatively cheap I bought in. Then THEY started to stumble on the operating side. The blame is still being put on theft, but I'm not sure how much of it is quite that simple, or how lasting it will be.

Dollarama is a very very good operator indeed. Earnings just keep rising every single quarter, a joy to behold. The stock price is amazingly resilient, so it's almost never on sale, the Costco effect. I bought in once, and did well, but made the mistake of selling when another opportunity came up (as is typical, in a market sell-off everything but those few resilient firms sells off). I did well on the other opportunity, but have spent years waiting fruitlessly for another dip in the DOL price to get back in. Dumb. Currently trading at about 35 times trailing earnings, so maybe a dip is not impossible.

Overall I have made a lot of money on these three in aggregate, but DG in the current cycle is definitely not doing anything for my record. Yet, anyway.

Jim

Back to DG, oddly it is up a bit today, while most other things are rather strongly down. At $122 at the moment.

Perhaps this adds a bit of strength to the notion that the recent relative-to-market bottom may hold?
One is never sure, but I think the value prospects from here offer longer term comfort and the "technical" suggests may offer an entry that has fewer bad omens than average.

Jim

Back to DG, oddly it is up a bit today, while most other things are rather strongly down. At $122 at the moment.

I'm impressed you are rather spot on, Jim. It's so hard to read more on a few days' price movement.

I confess I myself have no idea what those price movements were whispering to me except for more aggressive buy/sell by some at those precise moments.

Personally I am not sure DG will outperform the S&P 500 over the next year or two - I think I read some structural shifts in the tea leaves but I could be quite off. I just don't have a clearer vision either way on this one so I am just sitting out. You might as well continue to be successful picking up quarters in front of steam-rollers but longer-term positioning on better companies has worked better for me.

I am always paranoid about high debt level (if you take the capital leases into account, e.g.) 'cause such a debt-ridden company can spiral down quickly when caught at an awkward moment. I do wish you better luck than LYLT since you mentioned it had evolved into a meaningful sized position for you this time.

https://discussion.fool.com/t/fka-still-falling-ly...

Following Munger's wisdom of reverse thinking ("invert, always invert"), there is one thing I always do before I take a meaningful position in a stock. I make a list of things that I would look out for that would prove my initial thesis wrong or no longer valid. I put more efforts into watching out to disprove my thesis than looking for confirmation echoes (esp if there is no new angle). I wonder what do you dig into in checking that DG's business model is intact beyond just assuming that this time it is again cyclical? What would convince you that your thesis is suspect besides the eventual price movement?

I often think the numbers are at best supplementary whereas an understanding of the potential evolution of the business environment is critical.

Crashing again pre-market on a weaker than an expected quarter and lowered guidance, plus a mention in the release of 'decisive action'; at $95 (-23%) as I type. Sales mix trends continue (up in consumables, down in non-consumables). Call at 10 am ET.

Quite disappointing as a shareholder.


GOODLETTSVILLE, Tenn.--(BUSINESS WIRE)-- Dollar General Corporation (NYSE: DG) today reported financial results for its fiscal 2024 second quarter (13 weeks) ended August 2, 2024.

Net Sales Increased 4.2% to $10.2 Billion
Same-Store Sales Increased 0.5%
Operating Profit Decreased 20.6% to $550.0 Million
Diluted Earnings Per Share (“EPS”) Decreased 20.2% to $1.70
Year-to-Date Cash Flows From Operations of $1.7 Billion
Board of Directors Declares Quarterly Cash Dividend of $0.59 Per Share

“We made important progress on our Back to Basics plan in the second quarter,” said Todd Vasos, Dollar General’s chief executive officer. “However, despite advancing several of our operational goals and driving positive traffic growth, we are not satisfied with our financial results, including top line results below our expectations for the quarter.”

“While we believe the softer sales trends are partially attributable to a core customer who feels financially constrained, we know the importance of controlling what we can control. With the evolving retail and consumer landscape in mind, we are taking decisive action to further enhance our value and convenience offering, as well as the in-store experience for our associates and customers.”

“We made important progress on our Back to Basics plan in the second quarter,” said Todd Vasos, Dollar General’s chief executive officer. “However, despite advancing several of our operational goals and driving positive traffic growth, we are not satisfied with our financial results, including top line results below our expectations for the quarter.”


It's pretty easy to see why the shares are down $30, to $94. Same store sales were up 0.5%, despite 2.5% inflation, so falling behind in real terms. Shift to lower margin food continues. Theft getting worse, not better. Projected full year EPS of $5.50 to $6.20, compared to its previous expectation of $6.80 to $7.55. Even at $93/share, if they hit the midpoint of their 2024 target, $5.85, that represents 16 times earnings. You have to really believe that Vasos is going to be able to turn things around to want this investment, even at the new, lower price, and I don't see any reason to believe that. Give me some reason to believe, or a price more like 10 times earnings ($60?) and I would think about it. But I am closer to dealraker's pessimistic view, too close to Walmart, and that will get worse as they keep (for some reason?) expanding their store count.

dtb

It's pretty easy to see why the shares are down $30, to $94. Same store sales were up 0.5%, despite 2.5% inflation, so falling behind in real terms. Shift to lower margin food continues. Theft getting worse, not better. Projected full year EPS of $5.50 to $6.20, compared to its previous expectation of $6.80 to $7.55. Even at $93/share, if they hit the midpoint of their 2024 target, $5.85, that represents 16 times earnings. You have to really believe that Vasos is going to be able to turn things around to want this investment, even at the new, lower price, and I don't see any reason to believe that. Give me some reason to believe, or a price more like 10 times earnings ($60?) and I would think about it. But I am closer to dealraker's pessimistic view, too close to Walmart, and that will get worse as they keep (for some reason?) expanding their store count.

To me it's all about looking past the current rough spot. After first assessing whether the rough spot has an end, or partial end, at all.

It's about profitability.
Their worst year 2014-2021 amounted to a net profit margin of 5.2%, and that was in 2017 with a tax rate of 35.6%, so pre-tax profit margin 8.1%.
The midpoint of their sales growth and EPS forecasts for this FY amount to 3.03% net profit margin at an assumed tax rate of 23%, so pre-tax margin 3.9%, total operational profitability down by slightly more than half.
So, is that entire drop by half permanent? Where will the number settle in future?

They have relatively modest operational deterioration in a relatively large number of separate areas at the moment. They cited four factors in the 1.1% fall in gross profit, and another four in the 0.6% rise in SG&A, plus of course as you note SSS didn't keep up with inflation as a ninth factor. So it is hard to see how any quick fix will turn it around. Maybe the business model is permanently broken and 3% is the new normal for net margins, but as an optimist I suspect they can do at least a bit better than that as an average in the next decade.

For example, imagine they managed something like 4-5% net margin on average after they fix a few squeaks and slap on a fresh coat of paint. (not a forecast, just a math example). That's worse than the worst year in the cited pre-pandemic stretch, so it's not outlandish if they manage some degree of normalization. 4.5% would be the equivalent of cyclically adjusted EPS of about $8.90 next year. The current price $86.77 is about 9.75 times that as I type, less than the 10x multiple you mention. So an optimist would reason.

On the other hand, if something material doesn't improve then it's not a buy at this price. A broken business model, like a broken cup, has limited usefulness.

I'm not particularly happy, mainly because I don't have any idea how many of those factors might get better or when, but I'm not selling. Nor buying. Just sittin'. As a first optimistic guess, I still think I'll do fine, but it might be a considerably longer wait.

Jim

They cited four factors in the 1.1% fall in gross profit, and another four in the 0.6% rise in SG&A, plus of course as you note SSS didn't keep up with inflation as a ninth factor. So it is hard to see how any quick fix will turn it around. Maybe the business model is permanently broken and 3% is the new normal for net margins, but as an optimist I suspect they can do at least a bit better than that as an average in the next decade.

For example, imagine they managed something like 4-5% net margin on average after they fix a few squeaks and slap on a fresh coat of paint. (not a forecast, just a math example). That's worse than the worst year in the cited pre-pandemic stretch, so it's not outlandish if they manage some degree of normalization. 4.5% would be the equivalent of cyclically adjusted EPS of about $8.90 next year. The current price $86.77 is about 9.75 times that as I type, less than the 10x multiple you mention. So an optimist would reason.


I presume these are the 4 factors affecting gross profit:

-shift to less profitable consumables;
-increased promotional expenses (what the CEO calls "increasing our investment in markdown activities") ;
-increased front-end labour expenses (to control theft);
-continuing increases in theft (21 basis points worse than last year), despite their effort to combat it,


or 5, if you include slight decrease in inflation-adjusted same store revenues.

I don't see why any of those is going to get solved. The shift to consumables seems like they want to become a convenience store, a little closer to home and a little quicker in and out. It's a less profitable line of business, but I guess if they are pursuing that change, it's because they have been losing more profitable non-consumable market share. If they feel they need to spend money on promotion, I don't see that need going away, without hurting revenues. Increasing labour expenses and a trend towards a bit more theft are things I wouldn't want to bet against. In general, I'm afraid the dollar stores, not just DG, may be the low-hanging fruit that Walmart and the other big retailers (Target, etc.) can pick away at, with their greater efficiency and their ability to offer better prices.

Of course, there is a price for everything. 10 times current depressed earnings might be a fair price, if there is a realistic prospect of mean reversion of margins - I'm not really convinced, but let's say it could happen. But I don't want to pay 10 times the earnings I am hoping for, and not sure to get. And even if they can get margins back on track, how much do you want to pay for a company whose revenues are stagnating? I think the shear number of dollar stores may mean that their target market is saturated and further growth is very hard to find.

The shift to consumables seems like they want to become a convenience store, a little closer to home and a little quicker in and out. It's a less profitable line of business, but I guess if they are pursuing that change, it's because they have been losing more profitable non-consumable market share.

Actually, no. The major dollar store chains have (somewhat counterintuitively) seen moving to a higher mix of consumables as a strategic goal for a long time, despite the lower margins. They have been allocating more and more square footage to it. The goal there is increasing footfall and frequency of visits: a larger fraction of the population visits, and those who visit do so more often. A lower margin on some stuff is a good deal if it means (a) you're selling to that person more often, and (b) they buy some higher margin stuff as well some of the time. Like a loss leader, but without the loss. Within that, there will be cyclical variation as well. Sometimes the pop sells better, sometimes the bottle openers.

That strategic goal obviously has to be taken in the context of the other metrics, which are pretty uniformly in the wrong direction at the moment. During years that the consumables strategy is working you should see top line doing fairly well even as gross margin fades a little bit, and that is not the situation right now. But it would really have to be evaluated over a cycle to get a reliable answer.

Jim

The thought I like most in this link is the lag between the usual DG customers who are maxed out on credit etc. and therefore not buying as much, and the soon to be DG customers who have not yet shifted down to shopping at a dollar store.

https://www.mbi-deepdives.com/dg2q24/?utm_source=s...

Smufty - I finally bought DG today!

An interesting companion thought is about Dollar Tree's sympathetic sell-off. The two are similar, but also different, in that DG is more "near rural" locations and DLTR has its roots more in suburban malls. They will likely get a slightly different mix of headwinds.

Dollar Tree closed under $85 yesterday, down 43% from $150 or so as recently as March. Is the company really worth that much less than it was then? If not, then one of the prices was "wrong". Or both, of course.

The current price was first hit (within a few cents) in March 2015 when the sales per share were running under $38, and now over $140.

Sure, they too might have a bumpy patch. But I doubt they're going out of business. I'll do some more reading but I suspect I'll be a buyer today or in the next few days. Again.

Jim

I'll do some more reading but I suspect I'll be a buyer today or in the next few days. Again.

Yeah, I'm going to start back in with a little Dollar Tree. Another cycle starts.

My last complete exit was March 2022 at $153.70, so back in at under $84 looks good with sales per share about 25% higher than it was then. I don't think they're going bust, and I'm not going to place undue weight on next week's quarterly results one way or the other.

Jim

Yeah, I'm going to start back in with a little Dollar Tree. Another cycle starts.

Jim, could you share your thoughts on why you're purchasing DLTR instead of adding more to DG given how further depressed its price has become after the earnings release?

My line of thought was that the risk of DG failing to turnaround in the near future would likely be a damning indication of struggles with the dollar store business model as a whole.

In that event, if dollar stores turned around, DG would likely have the most to gain. And if dollar stores don't turn around, DLTR is likely to suffer the same fate as DG, with potentially more room to fall since it's not trading at as steep of a discount.

I also bought DLTR . Looking forward to the ER next week.

Jim, could you share your thoughts on why you're purchasing DLTR instead of adding more to DG given how further depressed its price has become after the earnings release?

Sundry reasons, not all of them that astute I suppose:

* I have a long history with owning (and selling, and owning) Dollar Tree, and have made a LOT of money doing so. Possibly my most profitable-ever pick after Berkshire? A bit of the "dance with who brung ya", mixed with "if it works, maybe try it again".
* As a result of the above, I have followed them very closely. I don't have as much of a history or deep knowledge with DG: sometimes you only get that from watching a firm you own over a period of years.
* I thought that they were getting towards the cheaper end of their cycle even before the recent drop.
* I already have a whack of DG, and things are weird enough at the moment that I'm not entirely confident which of them is getting hit with which problems that might not be merely cyclical, so a different pick makes some sense. Diversification is merely a defence against ignorance, but hey, it IS a bit of a defence.
* And of course DG's recent report really was stuffed with a litany of disappointments arising from a long list of different things going wrong. I'm disciplined enough to hold, but it takes even more confidence in one's estimation of the future to put in even more.

Dollar Tree was wrong about their acquisition of Family Dollar. The acquired stores, which did not have great economics, never improved to the level of economics of the original Dollar Tree stores. It has taken a few years to work through that mistake, and their valuations suffered for a long time because of it. But the rest of their business has been nicely profitable and growing.

if dollar stores turned around, DG would likely have the most to gain. And if dollar stores don't turn around, DLTR is likely to suffer the same fate as DG, with potentially more room to fall since it's not trading at as steep of a discount.

I don't think of it entirely that way. The "industry" problems aren't what scare me, mostly. To the extent that they are in the same business (which they aren't, exactly), there is good reason to think that the base case is that the business model will continue and the problems are primarily cyclical. I believe it's the company specific things that are harder to predict here.

Not sure who posted it, but it's an interesting viewpoint on DG: maybe the current lull is the "just before a downturn" gap after their poorest customers have started to run out of money, but before the next tier up is suffering so much that they have to trade down to dollar stores for necessities--bringing in a new customer population. The first effect is certainly a factor, given how DG has commented on how sales are much lower in the last week of each month lately simply because their customers run out of money. Of course I would like that comment, as it reinforces my confirmation-seeking desire that the problems at both be just passing clouds.

On the bad news front, maybe Walmart really is more of a threat to dollar stores than they used to be. I have to say from personal experience in Canada recently that the Walmart on-line experience is extraordinary, even (especially) compared to Amazon. It was my first experience with "what time today would you like your stuff delivered", not the sort of thing you get from Amazon, at least outside the US. In Europe the Amazon experience quality has been on a very slow slide over the years as they have become more of an "Ebay without the vendor rating system" as a larger and larger fraction of the site is just third party vendors, often dodgy ones.

Jim

moving to a higher mix of consumables as a strategic goal for a long time, despite the lower margins. They have been allocating more and more square footage to it. The goal there is increasing footfall and frequency of visits: a larger fraction of the population visits, and those who visit do so more often, and (b) they buy some higher margin stuff as well some of the time. Like a loss leader, but without the loss. Within that, there will be cyclical variation as well. Sometimes the pop sells better, sometimes the bottle openers.


Ok, I don't doubt that it's probably the right strategy, but it doesn't seem to be working. If it were, you would expect more consumables sales, with their lower margins, but at least slightly increasing non-consumables because of the increased traffic.

Non-consumables were $3.6b in the first 2 quarters of 2023 ($19.1b-$15.5b) and $3.5b ($20.1b-$16.6b) in the same periods in 2024; i.e. consumables were up by $1b, but non-consumables were actually down. Or over the last 3 years, consumables up from $26.3b to $31.3, but non-consumables actually dropped from $8.1b to $7.3b.

Thanks for the pop, and no, I don't need another bottle-opener?

Ok, I don't doubt that it's probably the right strategy, but it doesn't seem to be working.

No argument. I was just saying that there is a reason that they have been *wanting* more consumbables in the mix. It's not an bug, it's a feature... but a feature that hasn't been working, at least lately.

I suppose it's theoretically possible that their top line would even worse had then not rolled out the consumbables so much, but that's not exactly a cheerier thought, even if it shows that the strategy has been working.

Jim

I honestly don't recall being in a DLTR or DG store but one low end store I did visit once in a while was Big Lots. Not exactly the same. Big Lots is having a ton of trouble, closing stores and questioning whether they are heading to bankruptcy.

As a single guy who never was too fond of shopping, I didn't mind going to Big Lots since the people were generally nice, it wasn't very crowded compared to Walmart/Target/etc. and for some common household items the prices were good. Unfortunately the store closest to me is one that will be closed.

https://www.modernretail.co/operations/they-strugg...

In a June filing with the U.S. Securities and Exchange Commission, Ohio-based Big Lots reported plans to close 35 to 40 stores this year after the company’s net sales in its first fiscal quarter ending in May decreased year over year by $114.5 million, or 10%, to just over $1 billion. The discount retailer also took on $72.2 million in additional debt, now owing $573.8 million total. Big Lots counts 244 of its 1,392 stores as underperforming.

The company’s losses in recent quarters — including $205 million in the first quarter — and its use of hundreds of millions of dollars of cash since 2022 to fund operations are among the reasons it said “substantial doubt” has been raised about its ability to continue operations.
...
In hopes of turning around the business, Bruce Thorn, president and CEO of Big Lots, said in a news release last month the company is focused on owning bargains, communicating value, increasing store relevance, retaining customers through omnichannel efforts and driving productivity.

I presume these are the 4 factors affecting gross profit:

-shift to less profitable consumables;
-increased promotional expenses (what the CEO calls "increasing our investment in markdown activities") ;
-increased front-end labour expenses (to control theft);
-continuing increases in theft (21 basis points worse than last year), despite their effort to combat it,


or 5, if you include slight decrease in inflation-adjusted same store revenues.

I don't see why any of those is going to get solved.

I'm not sure any of these will get solved, but there are potential partial 'solutions' on all four.

The shift in sales mix has been discussed. I would add a small note: if you look at the quarterly data, you'll notice the drop really ramps up in Q2, 2023, and continues from there. A key part of the story, in my mind, is the removal of the pandemic era SNAP benefits (March 2023). The majority of DG consumers are in sub-$35k households (something like 60%). While the SNAP increase isn't returning, it is further evidence that some of the drop in non-consumables/discretionary spending is likely attributable to the sub-$35k consumer being more strapped than normal, due to the end of certain pandemic related benefits, and other related factors (inflation etc). (Is WMT better at stealing DG's sales, especially with respect to non-consumable sales? Yes, probably, but I also think the effect is being overstated with respect to DG's main consumer base. I would speculate that a separate issue here is that WMT looks like they are stealing the 'trade down' consumers that have historically traded down to dollar stores in the past. That's a real problem, and I don't know how it gets fixed without substantial investment in the quality of DG stores.)

So a partial solution is a return to a less constrained sub-$35k consumer. If this happens, it is likely to be a tailwind for non-consumable sales, and soften the need for markdowns.

Management wasn't exactly transparent on shrink, but they but did suggest on the call that they expect the issue to be a tailwind starting in 2025, due in part to the lag that attends shrink hitting the reporting. Beyond increasing front-end labour, the solutions appear to include the reduction of high-shrink SKUs, the continuing reduction in inventory, and an increase in store relocations/closures. Maybe runaway shrink is the new normal, and it may well get worse from here, but anything resembling a reversion to even close to normal shrink would be a decent tailwind.

Labour inflation and staffing troubles more generally is a big part of the story and I don't see it being an easy fix. That said, this is partly a cyclical issue. DG's margins are typically most compressed when unemployment rates are at their lowest, or shortly thereafter (see 2006-08, and 2019), due in part to increasing labour/SG&A costs during those time periods. We've had historically low unemployment for a couple years now. It appears the situation may now be reversing.

FWIW, Morningstar estimates mid-cyle operating margin at 7.2%. Down from their previous forecast of 8%:

We lowered our fair value estimate on Dollar General to $130 from $145, following its lackluster second-quarter results and uninspiring outlook. The firm continues to grapple with a weak spending environment as same-store sales growth of 0.5% landed below our estimate for a 2.25% gain. Operating margin also suffered a 170-basis point drop to 5.4% (versus our 5.7% forecast) amid intensifying promotional activity, wage growth, and headwinds from shrink. The outlook for fiscal 2024 looks to be increasingly uncertain as abating fiscal stimulus and elevated price levels appear to be pinching the wallets of Dollar General’s core low-income shoppers, prompting management to slash its full year guidance. To better align with management’s updated EPS outlook for fiscal 2024 of $5.50-$6.20 (from $6.80-$7.55), we reduced our forecast for full-year same-store sales growth to about 1% (from 2.5%) and lowered our operating margin forecast to below 5% (from 5.75%). We also think Dollar General’s trajectory for margin recovery looks increasingly arduous as it grapples with continued wage growth and makes necessary store investments. As such, we reduced our midcycle operating margin forecast to 7.2% (from 8%). Longer term, we expect Dollar General to post mid-single-digit top-line growth. We foresee the firm’s growth algorithm being driven by 2%-3% same-store sales growth (roughly consistent with its prepandemic trends) and modest store expansion. However, given the seemingly crowded footprint of dollar stores (Dollar General, Family Dollar, and Dollar Tree collectively operate over 37,000 stores), we anticipate future store growth to be more subdued. We forecast Dollar General to expand its existing footprint from 20,000 stores to around 25,000 by the end of our 10-year forecast (versus nearly 9,000 additions in the previous decade), equating to average annual growth of 2.3%. We expect Dollar General’s profitability to remain compressed in the near term as the retailer seeks to normalize its inventory levels and same-store sales growth moderates, limiting its ability to leverage selling, general, and administrative costs. As such, we don't forecast operating margin to reach 7.0% until fiscal 2028 and 7.2% (our midcycle forecast, which is about 120 basis points below 2019 levels) until fiscal 2029. Sluggish comparable sales growth, more-intense retail competition, wage growth, and necessary investments to improve working conditions at existing stores are the primary reasons for our reduced profitability outlook. Dollar General’s current store base appears to be stretched thin and contributes to our forecast for elevated capital expenditures over the following decade (at about 3% of sales).

there are potential partial 'solutions' on all four.

The shift in sales mix ... I would speculate that a separate issue here is that WMT looks like they are stealing the 'trade down' consumers that have historically traded down to dollar stores in the past. That's a real problem, and I don't know how it gets fixed without substantial investment in the quality of DG stores.)

So a partial solution is a return to a less constrained sub-$35k consumer. If this happens, it is likely to be a tailwind for non-consumable sales, and soften the need for markdowns.

Management wasn't exactly transparent on shrink, but they but did suggest on the call that they expect the issue to be a tailwind starting in 2025, due in part to the lag that attends shrink hitting the reporting. Beyond increasing front-end labour, the solutions appear to include the reduction of high-shrink SKUs, the continuing reduction in inventory, and an increase in store relocations/closures. Maybe runaway shrink is the new normal, and it may well get worse from here, but anything resembling a reversion to even close to normal shrink would be a decent tailwind.

Labour inflation and staffing troubles more generally is a big part of the story and I don't see it being an easy fix.


In an environment where people are feeling pinched, my understanding was that dollar stores should do particularly well, as people trade down to lower quality retail. The fact that their key demographic is getting pinched, and the next level up are not coming to dollar stores but maybe being stolen by other discount retailers like Walmart is in itself pretty troubling. One of the reasons I liked the idea of investing in dollar stores is as a hedge for rough economic conditions, a sort of anti-fragile investment, and if this isn't panning out, for whatever reason, for me that's a big negative.

Shrink and labour costs to me are intimately entwined - of course they could reduce shrink by hiring more people to man the checkout counters and to keep an eye out for what's happening, but that comes at a high cost. Maybe shrink will be a tailwind next year, but how much of that will be eaten up by a labour cost headwind? If they had such low levels of staff before, it was that they thought they could get away with it, and maybe they could, but as social norms change and police take a relaxed approach about theft, or are too defunded to worry about theft, it just may be that the low-labour model of small dollar stores doesn't work as well as bigger stores with better surveillance.

I guess as a non-USAian, I don't have a confident read on these 2 big questions, regarding the attractiveness of dollar stores for people in the middle class that hit harder times, and for this mysterious shrink that is not very precisely described by management. If the low margins were just the result of reversible management errors, the 'return to something like previous margins' idea would make me want to invest before those corrections kick in. Usually, 'this time is different' is not a good way to invest, and maybe poor people will go back to dollar stores and shrink and labour costs will come back down, but I just don't feel confident enough about this.

The other thing to worry about, as if the above wasn't enough, is their high levels of debt. They ran up a lot of debt in 2020-2022, much of it from repurchasing shares at over $200 a share. Now that their shares are at $83, they have $18b in market cap and $18b in debt, with about $1b in interest to pay every year, regardless of their level of sales. With just $2b earnings before interest and taxes, it would only take another 2.5% margin loss to mean they use all their EBIT just to finance their debt load. Perhaps they should suspend the dividend? That might be the smart thing to do, and that might also be the smart time to invest...

You're collapsing lease obligations with cost to carry the longterm debt. Long term obligations are at $6.2 billion.

They paid $167 million in interest the first 26 weeks, or about $334 million annual. Not 1 billion interest on $18 billion debt.

The other thing to worry about, as if the above wasn't enough, is their high levels of debt. They ran up a lot of debt in 2020-2022, much of it from repurchasing shares at over $200 a share. Now that their shares are at $83, they have $18b in market cap and $18b in debt, with about $1b in interest to pay every year, regardless of their level of sales. With just $2b earnings before interest and taxes, it would only take another 2.5% margin loss to mean they use all their EBIT just to finance their debt load. Perhaps they should suspend the dividend? That might be the smart thing to do, and that might also be the smart time to invest...
...
You're collapsing lease obligations with cost to carry the long term debt. Long term obligations are at $6.2 billion.
They paid $167 million in interest the first 26 weeks, or about $334 million annual. Not 1 billion interest on $18 billion debt.

FWIW, a "normal" year for them is net profit AFTER tax of, say, $1.6bn to $2.6bn. The $1.6 being anomalously low recent results which may or may not last. I was a little startled to see that their interest costs in the first half were actually lower than in the first half last year, but we'll see what happens when they roll more debt.

There is of course a bear case to be made. But personally I don't think their debt is anywhere near unsupportable since I have confidence in their ability to make a good buck in the normal year in future. The most rational worries do seem to be about labour costs, as they have traditionally run a very lean operation at the store level, to say the least.

Jim

https://corporate.dollartree.com/investors/news-ev...

About 10% down in pre market.

Dreamer

DG ($82/share, down $1.90 today): Management now anticipates earnings in the band of $5.50-$6.20 per share, revised down from the prior range of $6.80-$7.55.

DLTR ($66.50/share, down $15 today): Fiscal 2024 Adjusted earnings per share (EPS) are now expected to be within a range of $5.20 to $5.60, compared with $6.50 to $7.00 previously.


Looks like Dollar Tree didn't like having the same share price as Dollar General. Now DG is at about 14 times this year's (depressed) earnings, and DLTR is now at 12x. It slightly reinforces the idea that DG's problems are not because of (correctable) management missteps but rather some sector wide malaise.

About 10% down in pre market.

I bought some Dollar Tree at $64.97. I do hate to ignore a panic.

The stock price may languish for quite a while, but I think it will work out nicely soon enough to offer a decent rate of return. Obviously I am in the minority with that view : )
DG still seems to be the better firm. They don't have the Family Dollar albatross.

For the desperate optimist, the DLTR Q2 press release is not 100% bad. It was nice to see that Dollar Tree saw increasing footfall. Up 1.1% YOY overall, 1.5% at Dollar Tree branded stores. More people coming in the door, the average one spending less, so very much in tune with the key narrative at both chains that the customers themselves just don't have a lot of cash (rather than, say, that they're shopping elsewhere). And gross profit and gross margin were up. And I'm not sure that it means much, but the press release does not contain the word "shrink". The rest of the report is all bad, of course.

They bought back 750k shares at an average price of $121 for 90.8 million, which equals 69% of the quarter's net profit. It's quite impressive that it was such a bad price in hindsight. They must of done the buying in the first two weeks of the quarter (first half May) before the subsequent share price slides, then stopped buying during the slide.

Jim

Anyone here able to explain Dollarama as outlier, outside of them running a tight ship?

Maybe the reckoning is around the corner, but I don't see a lot to distinguish DLR.TO from DLTR as a business model, beyond the differences in Canadian consumer profiles & its grocery industry -- not the cleanest place I've shopped, though there's quite a bit of variance; 'difficult clientele', to say the least (local DLRs often serve as a crack etc user meeting ground in the urban cores of the Canadian cities I've lived in); threadbare staffing; a WMT almost always a 20 minute drive, or an online order, away (along with AMZN/TEMU); etc.

I had owned it and sold it based on valuation concerns (wouldn't buy at today's prices either), but I haven't kept track since.

Up over 40% this year. No pullback from DG or DLTR results, which are being interpreted by some as proof that WMT etc has killed the dollar store. Next reporting is Sep 11, but things have been smooth to date.

I suppose I take it as evidence that Dollar Stores aren't going extinct, but I'd be curious to hear an explanation of the stark difference.

I think that Dollarama is primarily Canadian, and may not have seen the large increase in minimum wages in the last couple of years. Minimum wages have to be hurting the dollar stores in the us.

Jk

I suppose I take it as evidence that Dollar Stores aren't going extinct, but I'd be curious to hear an explanation of the stark difference.

Perhaps there are just some differences between the "hard discount" consumer crowds between the two countries? Even things as simple as the hangover from the US helicopter cash during the pandemic, which is causing a lot of negative comps in a lot of businesses. Or something more "core"...a little known trivia item is that the median Canadian is quite a lot richer than the median American in USD terms. The shapes of the income and wealth distribution curves are very different. Or it could come down to the fact that Canada is a smaller market, so many industries have much higher concentration, giving the leaders higher pricing power. Check out the price of a Canadian mobile subscription.

Incidentally, my lovely spouse is a keen dollar store aficionado in Canada. She reports that Dollarama is the go-to choice for the discerning dollar shopper. Dollar Tree locations are often grubby, though with wide variation, some being nice. This is a photo she took about three years ago at a Dollar Tree in Ontario, not GTA. http://stonewellfunds.com/DollarTreeShelves.jpg

Jim

For the desperate optimist, the DLTR Q2 press release is not 100% bad. It was nice to see that Dollar Tree saw increasing footfall. Up 1.1% YOY overall, 1.5% at Dollar Tree branded stores. More people coming in the door, the average one spending less, so very much in tune with the key narrative at both chains that the customers themselves just don't have a lot of cash (rather than, say, that they're shopping elsewhere). And gross profit and gross margin were up. And I'm not sure that it means much, but the press release does not contain the word "shrink". The rest of the report is all bad, of course.

They bought back 750k shares at an average price of $121 for 90.8 million, which equals 69% of the quarter's net profit. It's quite impressive that it was such a bad price in hindsight. They must of done the buying in the first two weeks of the quarter (first half May) before the subsequent share price slides, then stopped buying during the slide.
...

You are an eternal optimist! Of course, that's usually a good thing. And it is true that higher traffic is a good sign, even if their target customer has an empty wallet.


I don't see a lot to distinguish DLR.TO from DLTR as a business model, beyond the differences in Canadian consumer profiles & its grocery industry -- not the cleanest place I've shopped, though there's quite a bit of variance; 'difficult clientele', to say the least (local DLRs often serve as a crack etc user meeting ground in the urban cores of the Canadian cities I've lived in); threadbare staffing; a WMT almost always a 20 minute drive,...

Dollaramas started in Quebec, and have spread all over Canada, but they really are much more heavily concentrated in non-urban settings; have a look at this map:
https://www.redliondata.com/wp-content/uploads/201...

If you looked at a population map, Canada is very urbanized, with most of the population in cities within 100km of the southern border, and these Dollarama dots show a lot of stores in small towns a long way from a Walmart. There's one in my small town, and a few more in my region, with no Walmart for 300km ...


...Dollarama is primarily Canadian, and may not have seen the large increase in minimum wages in the last couple of years. Minimum wages have to be hurting the dollar stores in the us.

I think we have had the same increase - even worse, for employers: it is true that the minimum wage has gone up a lot, from about $10 ten years ago to $15.75 now in Quebec (different in every province). But employers like Dollarama and Walmart have to offer a lot more than $15 just to get jobs filled. It's great having low unemployment, but this is one of the side effects - minimum wage lows are becoming obsolete.


dtb

Further to Dollarama,

I just bought a coffee cup in the local store. They really do have a pretty nice setup.

First of all, tidy as hell, today at least - I felt underdressed, in my cycling shorts and socked feet (had to take off my cleated shoes). They have prices that are mostly $1, $1.50, $2, $2.50 (my cup), and some $5 items, each with their own sticker with its bar code.

All the shelves looked pretty well stocked, back to school being the current theme, but soon it will be Halloween.

There were about 30 people in the store, 6 or 7 aisles. Very little food, but things like cookies and candies.

Check-out was really quick, and they have removed the usual cash register, you really have to scan everything yourself, but compared to grocery stores, it really is easy, since everything has a bar-code, there's no weighing, and no hunting for the code for fresh fruit and vegetables. There was a helpful woman supervising the 5-6 self-checkout stalls (and I suppose keeping an eye out for shrink.)

I hadn't been for a while, but there's definitely a treasure-hunt aspect - I can see why people would go there, even if you can probably get things more cheaply elsewhere.

They really are a profit machine, I can see why the P/E is 36. Sales going up quickly, $1b in net income on $6b in sales.

Gun to my head, I think I would rather pay $38b for Dollarama's $1b in earnings rather than $18b for Dollar General's $1.4b in earnings. I'll think it over tomorrow morning with a nice cup of coffee in my new peach-coloured cup with a lime-green handle.

Dollaramas started in Quebec, and have spread all over Canada, but they really are much more heavily concentrated in non-urban settings; have a look at this map:
https://www.redliondata.com/wp-content/uploads/201...

If you looked at a population map, Canada is very urbanized, with most of the population in cities within 100km of the southern border, and these Dollarama dots show a lot of stores in small towns a long way from a Walmart. There's one in my small town, and a few more in my region, with no Walmart for 300km ...

While I don't doubt Dollarama has non-urban stores, they aren't primarily a rural or non-urban thing. If you go to the Dollarama site, you can search by city.

https://www.dollarama.com/en-CA/locations/stores-n...

Here are some basic numbers searches I did:

44 DLRs are within 20km of Winnipeg. Manitoba has a few more than 47 DLRs, total.

Alberta has a few more than 154 DLRs. 57 are within 20km of Calgary. A further 51 are within 20km of Edmonton. Another 15 are within 20 km of Red Deer and Lethbridge, combined. So 123 of the 154 and change Albertan DLRs are within 20km of Alberta's four largest municipalities (about 80%).

170 Dollaramas (a hair more than 10% of DLRs 1569 total Canadian stores, per the latest report) are within 30km of Toronto's Union station (i.e., leaving out large chunks of the GTA, or surrounding cities like Hamilton). Another 176 are within 30km of downtown Montreal.

So 20% of stores are within 30km of the downtown cores of Toronto or Montreal. I can go on (61 Ottawa, 47 Hamilton, 47 Quebec city, etc.)

I'd wager the vast majority of the above stores are also within 30km of a Walmart.

Slightly dated source for the rough provincial store counts: https://www.statista.com/statistics/436688/number-...

Some helpful commentary by Abdullah Al Rezwan (MBI Deep Dives) on DG/DLTR's recent results, and the extent to which DG's issues are a cyclical macro issue (versus a competition issue re WMT or TEMU/AMZN:

https://www.mbi-deepdives.com/dg_sept2024/

Also includes some helpful commentary by Alex Morris (TSOH).

I also found the GS Conference transcript more revealing than the recent earnings call, FWIW. Available here: https://archive.ph/bwXWx

It seems to me that there's quite a bit of evidence to support the view that management's view that the $35k consumer is under considerable pressure at the moment, and at least some of DG's current issues are cyclical.

Ally Financial's earnings report this today is another good example (increasing delinquencies in its auto business).

I've decided to hold on to my position for the foreseeable future. My estimate of fair value is lower than it was, but the stock is still well below that estimate.

An interesting link, thanks.

They mention in passing
"...increase my notional exposure to DG via long-dated call options... own January 2026 $45 Calls for which I have paid $36.8 per share.

Almost the same contract I bought yesterday : )
I got some $40s for 41.43. Most of the "implied interest" cost of the leverage is foregoing the after-tax amount of the dividends that will be paid prior to expiry, maybe $2.50.

Jim

Anybody have any idea when the next DG LEAPS
expiry might show up?
Thanks
:-)Shawn

Anybody have any idea when the next DG LEAPS expiry might show up?

Your question is timely.

https://www.optionseducation.org/referencelibrary/...
"All of the 2027 LEAPS® will be introduced on Monday, September 16th, 2024."

Anecdotally I've found it best to wait a few days till all the market-makers and arbitrageurs have their systems running and tuned before trying to trade.
Maybe I was imagining things, but it seems I've seen some strange quotes and gaps the first couple of days of trading.

Jim

This seems to be the central discussion forum for Dollar General.

For various reasons, I have been modeling the impact of a China invasion of Taiwan in my portfolio. I know that most non-grocery items in discount retail, even moreso than other sectors, are China imports. I know there are US macro reasons for the drop in price across a number of US discount chains, but I'm concerned this is another signal and I own shares of DG and I'm not sure what the short and long term impact would be.

I suspect, to the point where global logistics weren't impacted, that supply chain would shift to India, Vietnam, and other countries offering similar production capability. I don't think the need for these types of chains would go away, either. But I was curious for others thoughts. DG (and Intel, also involved in modeling this scenario) are both prominent Falling Knives.

For various reasons, I have been modeling the impact of a China invasion of Taiwan in my portfolio. I know that most non-grocery items in discount retail, even moreso than other sectors, are China imports.

This used to concern me, mainly as a currency exposure: dollar stores, like Walmart, could be over-simplified as a firm that buys in yuan and has revenues in US dollars--a fall in the dollar would be bad.

Tariffs are very bad, obviously, and probably a bigger risk than geopolitics. If a serious trade (or other kind of) war breaks out, I think plastic umbrellas for cocktails might not be the first goods to be halted.

But I have learned that the Chinese share is lower than I expected at the dollar stores. A large part of the reason is simply the fraction of food consumables, and they do have quite a few other suppliers including American, Mexican, Vietnamese and Indian ones.

Dollar General has said that they have been actively decreasing their China share in recent years. "We have already reduced our sourcing exposure to China this year alone by approximately 7%" (Vasos in 2019). I found an article that said Dollar Tree was around 40% Chinese goods, but even that sounds a pinch high.

Jim

This seems to be the central discussion forum for Dollar General.

On that theme, going further afield in this thread:

An interesting article on Dollarama, a Canadian chain of dollar stores with a formidable record.
https://www.hardingloevner.com/fundamental-thinkin...
"Dollarama earns a higher profit margin than any other large department store or discount chain in North America, including Target and Costco....
And of the 50 largest consumer-discretionary companies globally—a broader bucket that includes US giants such as Marriott and McDonald’s—Dollarama’s operating margin ranks ninth, just behind the luxury brand Christian Dior."


As you might expect from their impressive financial results and fairly recession-resistant business area, the stock rarely gets cheap. A little like a Canadian Costco in that way, except that Dollarama has increased in value per share much faster on almost any metric, and generally trades at a lower (though still rich) valuation multiple. It is a little pricier at the moment than its own usual level, maybe 20-30% richer? At least EPS have been growing faster lately than their own usual.

My lovely spouse is a big fan as a client when we're in Canada. I'm a fan as an investor, though I unwisely sold at some point in the past and stupidly haven't bought back in.

Jim

I've read the posts about Dollarama with interest, and while I'm usually US-focused outside of some interest in junior/mid miners I have Unilever and have been waiting for a better entry point (regrettably and unprofitably) with Alimentation Couche-Tard and Dollarama.

Thanks, re DG and China supply impact. I'd seen numbers from 40-80% and wasn't sure if that was gross sales or profit.

"... I have been modeling the impact of a China invasion of Taiwan in my portfolio. I know that most non-grocery items in discount retail, even moreso than other sectors, are China imports. I know there are US macro reasons for the drop in price across a number of US discount chains, but I'm concerned this is another signal ..."

Delegating significant US production capabilities to other countries, especially in arenas of strategic significance, is inadvisable.

Countries are discrete cultural entities, with decision-making processes entirely distinct from our own. This diminishes present accordance as a reliable predictor of ongoing alignment. Better than nothing, no doubt, but far from assuring.

We must aspire to manifest all of our essentials as best we can.

Tom

Sub $73 today, based on a reaction to Target's earnings and guidance. Now at roughly 12.5 estimated 2024 earnings.

I haven't seen any news of DG rolling out debt. My assumption is they aren't, and are paying off the Sep 2024 notes with cash on hand (note was at $750 million) -- which had grown from $353 million to $1.22 billion from Aug 29 2023 to Aug 29 2024. Has anyone seen news on this?

Even still, given the cash continuing to come in, I imagine DG is getting close to resuming buybacks, if store profitability isn't degrading further (analysts are still projecting in increase in EPS next year, not a decrease, FWIW).

I don't think the dividend is in trouble, but using all or most of the cash rolling in to buyback shares would sure be a better use of funds at the moment.

Notes outstanding as of the last 10-Q (end of August):

4.250% Senior Notes due September 20, 2024 (net of discount of $58 and $230) 749,942 749,770
4.150% Senior Notes due November 1, 2025 (net of discount of $117 and $162) 499,883 499,838
3.875% Senior Notes due April 15, 2027 (net of discount of $136 and $160) 599,864 599,840
4.625% Senior Notes due November 1, 2027 (net of discount of $351 and $400) 549,649 549,600
4.125% Senior Notes due May 1, 2028 (net of discount of $210 and $237) 499,790 499,763
5.200% Senior Notes due July 5, 2028 (net of discount of $112 and $124) 499,888 499,876
3.500% Senior Notes due April 3, 2030 (net of discount of $409 and $441) 960,485 951,240
5.000% Senior Notes due November 1, 2032 (net of discount of $2,057 and $2,155) 697,943 697,845
5.450% Senior Notes due July 5, 2033 (net of discount of $1,459 and $1,521) 998,541 998,479
4.125% Senior Notes due April 3, 2050 (net of discount of $4,621 and $4,670) 495,379 495,330
5.500% Senior Notes due November 1, 2052 (net of discount of $286 and $288) 299,714 299,712

Seems like Amazon, Costco and Walmart are in a class of their own and everybody else is roadkill.

Target offered a very lame excuse of high inventory due to anticipated port strike. Why didn’t that effect WalMart?

Most of the dollar store woes are self inflicted, reflecting inability to perform basic retail competencies like staffing, stocking and theft prevention.

Why didn’t that effect WalMart?
Most of the dollar store woes are self inflicted, reflecting inability to perform basic retail competencies like staffing, stocking and theft prevention.

It's true that Walmart has been on a roll. Good for them. They are doing well, and (to overgeneralize), all other retailers are seeing deterioration. A part of me rather wishes I had been long them rather than (say) DG and DLTR, despite the (ahem) uncomfortable recent valuations. To be honest, had I owned Walmart recently, I would have sold long before this despite the good results--I am not one to hold meaningful positions in things sufficiently pricey that there is no rational case for a decent five year return starting from current valuation levels.

However, I have a sneaking suspicion that a certain portion of that recent undeniable business advantage is a function of this particular point in the business cycle, but that's just a speculation. (deep discount retailers tend to do poorly relative to others in the early stages of a business cycle slowdown, but tend to to much better than average retailers during the middle and later stages)

As for the dollar store problems, I tend to disagree with your comment about having only themselves to blame. Maybe the could have prepared better (overdoing self checkout seems a particularly dangerous move), but I think they are primarily a victim of broader forces, some cyclical and some perhaps not.

The whole theft thing is so overblown. "External" (non employee) theft is only typically only (say) 1/3 of shrink, and in any case shrink is lower as a percentage of US retail sales than it was in 2019, not higher. What's that reporter's adage? Three incidents make a trend.

Shrink and theft are up, sure, no argument. And there has been the newish phenomenon of organized retail theft, shelf sweeping and the like. But the overall shrink loss rate is up mainly from an unusual recent low. I think a lot of CEOs have been looking for excuses on earnings calls. If you're a CEO, would you rather pin weak results on yourself or on a Fagin?

Jim

yes, exactly.
retail is a brutal business, and there is a high likelihood that ANY of these companies could\would blame external factors had their relative decline been such. expect the c-suite, as a whole, to expound in a manner they hope will allow them to retain privileged positions.

of course, one could say costco would never suffer such a fall, but there is a massive price to pay for jumping into that thesis (or even holding on to it).

The whole theft thing is so overblown. "External" (non employee) theft is only typically only (say) 1/3 of shrink, and in any case shrink is lower as a percentage of US retail sales than it was in 2019, not higher. What's that reporter's adage? Three incidents make a trend.

Shrink and theft are up, sure, no argument. And there has been the newish phenomenon of organized retail theft, shelf sweeping and the like. But the overall shrink loss rate is up mainly from an unusual recent low. I think a lot of CEOs have been looking for excuses on earnings calls.


Maybe shrink is not an increasing problem across the full spectrum of retail, but it could still be an increasing problem for dollar stores. Shrink must be easier to prevent when you are selling things online, or selling big-ticket items with anti-theft tags, or when you have tight inventory control that is getting better with technology. When I look for a pair of pliers online, the Home Hardware website says there are two pairs left, on aisle 29, at my local store. Dollar stores are understaffed, messy, uncomputerized, don't sell online and sell cheap items that aren't worth putting a tag on. Perhaps an increase in shrink in dollar stores is hidden in the overall statistics because it is much worse in dollar stores but they are only a small part of the whole retail picture and shrink is ok in the rapidly increasing online and higher-tech retail sector?

That said, there's a price for everything. At $75 a share, DG is at 11-12 times last year's earnings and next year's earnings estimates, or about 8 times earnings if they can get margins halfway back up to where they were the previous 3 years. If I had any confidence that this was going to happen, I would buy them. But I suspect their margin problems are not just shrink, but also the fact that they have been adding a lot of lower-margin food sales to the mix. If 81% of their sales are consumables, where they have big competitive disadvantages already against Walmart and other grocery stores, how is this fixable? https://www.statista.com/statistics/253589/share-o...

Consumables were 79.7% of sales in 2022 and 81% of sales in 2023.

2023 was the first year in which DG's margins took a nosedive and profits suffered materially ($10.68 EPS to $7.55 EPS).

In other words, DG was a stock market darling hitting impressive margins even when its sales mix was not far off from its current mix, i.e., even when it was competing directly with WMT and all the others on the sale of consumables. Similar can be said about the years running up to 2020. High consumable sales, great profits and margins.

If a 1.3% change in consumables a percentage of total sales could have such a massive effect on margins, you'd expect it to show up over the decade prior, when DG's sales mix moved from about 71% consumables, up to about 80%, slowly but surely. Margins remained very healthy throughout that entire period.

Does the change in sales mix have some affect DG's margins, going forward? Almost surely. But the significant hit to DG's margins and profits in 2023-2024 are very hard to explain by reference to changing sales mix. Something else happened. Probably a few things.

https://m.macrotrends.net/stocks/charts/DG/dollar-...

Not looking good.

But I suspect their margin problems are not just shrink, but also the fact that they have been adding a lot of lower-margin food sales to the mix. If 81% of their sales are consumables, where they have big competitive disadvantages already against Walmart and other grocery stores, how is this fixable?

As mentioned elsewhere (e.g. post 360 in this thread), this is a feature, not a bug. They have a strong strategic goal to increase the fraction of goods that are consumables, because it has a huge effect on frequency of visit. The theories behind it are (a) higher turnover largely makes up for the lower margin, and (b) people who are there for consumables will frequently also buy something else with a higher margin. Like any business, there is no one metric (in this case gross margin) that tells the whole story, especially one that management has been (in effect, indirectly) *trying* to push down. It would be more informative to look at trends of gross margin in non-consumables, if it were reported separately.

An additional very US-specific reason is that a lot of the consumables can be paid for with food stamps, not an inconsequential consideration for many of their core clients. Dollar General is in the top 3 destinations for SNAP dollars. As of a May report, the share going to dollar stores was rising, and to supermarkets falling.

Of course, over longer periods of time this strategy of having more food&bev has to demonstrate its veracity, say comparing two similar periods in the business cycle to see if the overall margin dollars per square foot have risen in real terms. If the sales are staying the same and the *only* change is falling margins (comparing similar periods in the cycle) then the strategy isn't working, or at best is only working enough to counteract other bad trends. Right now it's kind of simple, in that there is no particularly good news to be had on any front. It's either an unfortunate cyclical point or a bad trend.

Jim

The theories behind it are (a) higher turnover largely makes up for the lower margin, and (b) people who are there for consumables will frequently also buy something else with a higher margin. Like any business, there is no one metric (in this case gross margin) that tells the whole story, especially one that management has been (in effect, indirectly) *trying* to push down. It would be more informative to look at trends of gross margin in non-consumables, if it were reported separately.

...

Of course, over longer periods of time this strategy of having more food&bev has to demonstrate its veracity, say comparing two similar periods in the business cycle to see if the overall margin dollars per square foot have risen in real terms. If the sales are staying the same and the *only* change is falling margins (comparing similar periods in the cycle) then the strategy isn't working


Sales are up a bit, but it would be hard to say that the strategy is working - presumably, the consumables are low margin but not negative margin, so if income from operations is down steeply, as it is, from $3.6b in 2021 to $2.4b last year, or $2.1b TTM, if the strategy is working, it is just nullifying some other terrible phenomenon that is going the wrong way.

I guess the dilemma I have is, is this a good short term bet, and how short is short? I don't want to own them over the medium term, as I think everything is going against them - the shift to online retail, tariffs, the encroachment of other, cheaper discount retailers (particularly Walmart), and even, over the longer term, the gradual rise of prosperity, which means you are probably better to be at the aspirational end of the spectrum than at the bottom.

It is true that at 12 times earnings, if they can just recover a little bit, say getting margins halfway back to where they were a few years ago, then this could be good for a double in 12 months. I'm tempted, but haven't quite convinced myself.

Yes, one day DG will hopefully double as long as it doesn't go under first.

Dollarama was called expansive. It was up 45% YTD vs -44% for DG. Apple was called expansive for a few years and yet it's up another 33% YTD. What % of your portfolio are you prepared to commit to "deep values" and how does the return compare to S&P long term?

I think people are following Buffett's too closely (e.g., buying OXY ; selling APPL, BYD). He's playing a difficult game given his circle of knowledge (everyone has limitations) and the size of his portfolio. People try to imitate him blindly but they often got the wrong perspectives.

https://www.shrewdm.com/MB?pid=733198256

Yes, one day DG will hopefully double as long as it doesn't go under first.

Dollarama was called expensive. It was up 45% YTD vs -44% for DG. Apple was called expensive for a few years and yet it's up another 33% YTD. What % of your portfolio are you prepared to commit to "deep values" and how does the return compare to S&P long term?

Well, certainly DG might or might not be a good investment. The price has been very cyclical for both DLTR and DG in the last 20 years, unlike their businesses, and I have made good money on each cycle. The question is whether the current weak stretch is just another cycle, or the harbinger of ultimate doom. If this is truly the end of the line for their business model, then yes, it could be a poor investment and I could lose quite a lot of money. We'll see. But I don't think they're in danger of going under, as they still make a nice profit every single quarter. Round numbers, $1-2 per share per quarter. It's quite hard to go broke so long as that sort of thing keeps happening even in weak stretches.

If it's NOT the end of the line, and margins can get even part way back to the old norm, they do look pretty attractive...the low share price is good news (good forward returns more likely), not bad news. Sales per share these days are 2.9 times as high as the first time they were trading at this price around mid 2015.


A more subtle point is that it's very hard to know in advance which firms will have their underlying business do well, and which will have their share prices do well for a while. If you pick something richly valued on meaningful metric, then the business MUST do particularly well in future, as you have already paid for that bright future which may not happen. if investing at rich valuations, you have to get BOTH your forcast of the business AND your expectation of continuing high valuation levels to be right. If either is off, you lose money, and generally it's permanently.

I think valuation levels are more important than anything else in terms of where to put your money. But I'm speaking of valuation levels relative to what a firm is likely to be worth several years down the road, or at least relative to its own history, not merely the latest P/E which isn't particularly predictive at all. I'm happy to pay (say) 30-40 times current earnings, but I'm unwilling to pay 15 times plausible earnings 5-10 years from now. A "deep value" stock to me is something trading at under 10 times "pretty darned likely" average real earnings per share 5-10 years out.

I do like a margin of safety, so I prefer not to prepay for an uncertain bright future, which I guess makes me a value investor.
You ask how much one might be prepared to commit to "deep values" and how well does it do relative to the S&P? For me the answers are "lots", and "pretty well".

My main portfolio, say 90%+ of my investments, is essentially all value picks depending on your precise definition. It's doing fine. It is up 13.4% on its average balance since end January, while averaging 57% cash. (end January because I shuffled my assets around a lot in January, not because it was a sweet spot for a baseline measurement). It's not all plain long stock--I do a lot of derivatives on them based most often wagering on mean reversion of valuation levels. On a time-weighted basis in the last year I'm very slightly beating the S&P 500 and very slightly lagging the Nasdaq at around 26%, despite the cash allocation. That result includes a substantial mark-to-market loss on DG this year, of course : )

Apple, which you mention, is a very formidable firm. You make a good point that a high valuation level can work out well, but not a convincing point that it's a good idea on average to buy firms with high valuation levels. (what I define as high multiples of plausible earnings 5-10 years from now). Very high valuations don't tend to last forever. Recall that Apple was trading at a multiple of 10-12 trend earnings not that long ago (much of 2016, for example), and the consensus was that it wasn't worth any more than that. (and I was quite bullish on it 2013-2016; I like 'em cheap). The earnings per share are running around twice what they were 5-6 years ago, a very nice result especially as they aren't cyclically high now...but the price is five times as high. The mood and therefore valuation is much more chipper now, yet the business is not growing nearly as fast as it was on any metric. That combination was not predictable, so the particularly high returns ending now were not predictable even if you knew how the business would do. I would not say with absolute certainty that the combination of slow growth and exuberant valuation will end, but that seems to be the likely outcome.

I guess I'm an old fuddy-duddy, insisting on a decent chance that a company will earn some decent money relative to purchase price within a reasonable time frame. But I'm OK with that.

Jim

Congratulations, Jim, on your stellar return this year despite hoarding so much cash and having such challenging battles in some of your stocks ... DG (DLTR? KMX? vs S&P 500, I mean). I really haven't paid too much attention to what you do (so pardon me if I mis-perceive how your have been trading) as I prefer to be reasonably insulated from outside noises.

https://www.shrewdm.com/MB?pid=-2&previousPostID=2...

I think it won't be easy for me to pick pennies like you tracing a falling stock. Rather, I focus on taking concentrated positions in good growth companies with strong moat and let profits ride for a long period of time. Contrary to your belief, I'm quite risk-averse and scrutinize the downside much more intensely than the upside when I set up a position, but I'm super long-term oriented with a decent cash buffer so I'm not too bother with what might happen in the next year or two. And I do utilize options to facilitate better entry points and to hedge.

Now, my portfolio is about 15% in cash at the moment and my stock portfolio is up 37% YTD. My only sizable position in tech stock is Apple. I had no meaningful loss in any of my U.S. positions this year (obviously due to luck and the runaway bull market). The 5-year annualized return of my stock portfolio is 10%+ over my benchmark of S&P 500 (with cash position ranging from 5% - 15% each year).

Congratulations, Jim, on your stellar return this year despite hoarding so much cash and having such challenging battles in some of your stocks ... DG (DLTR? KMX? vs S&P 500, I mean).

Indeed, I have been pleasantly surprised, especially given the cash drag.
The main reason this portfolio did well is pretty boring...I was very heavily long Berkshire which has done well. Especially early in the year before I went more "neutral" on it by writing some high strike calls. Berkshire hasn't done any better than the S&P, but I did include some leverage from in-the-money-calls so it jumped quickly.

As you note, some of the picks I have posted about have not been big winners this year. My non-Berkshire positions (other than interest on cash) have been relatively flat overall in this account--some things did well, others didn't. My separate quant portfolio is doing fine, but it's smaller. Simple reason there: no short or kinda-short positions.

Jim

That's impressive, Jim. Managing risk/reward is certainly about making a huge amount when you are right and still keeping up and not being hurt too badly when you are out of sync with the market.

The question is whether the current weak stretch is just another cycle, or the harbinger of ultimate doom. If this is truly the end of the line for their business model, then yes, it could be a poor investment and I could lose quite a lot of money. We'll see. But I don't think they're in danger of going under, as they still make a nice profit every single quarter. Round numbers, $1-2 per share per quarter. It's quite hard to go broke so long as that sort of thing keeps happening even in weak stretches.
If it's NOT the end of the line, and margins can get even part way back to the old norm, they do look pretty attractive...the low share price is good news (good forward returns more likely), not bad news. Sales per share these days are 2.9 times as high as the first time they were trading at this price around mid 2015...

The general weather situation remains unchanged: I haven't made any money on DG lately, though a desperate optimist would note that it's doing better than the average S&P 500 stock in the last three weeks. But I thought I would re-post some comments I made at the Berkshire board, since this is a DG thread, on the subject of WHY DG and Dollar Tree have had this weak stretch. Guessing whether or not it will end requires first that you guess why it happened in the first place.


The shoplifting narrative have been greatly overpushed, methinks. For one thing, shoplifting and organized retail crime still account for only around a third of shrink--most of the problem is internal. Across US retail, aggregate shrink is barely above levels before the pandemic. The median retailer figure went from 1.2% in 2016 to 1.4% in 2022. Woo! I think the story has some truth, but I also think the discount retailers have been overhyping it to place blame one someone, anyone.

There is one under-reported narrative, however: overseas competition.

The market share of Temu among discount shopping (low income households) has gone from nothing to 17% since 2022. In the same measure and same time frame, the market share of DG fell from 63% to 52%, and Dollar Tree fell from 25.5% to 19.5%, a drop of 15% between the two of them. It's a different kind of shopping for household goods or clothes or toys, but it's coming from the same pool of shopping money, so the striking symmetry of the market share changes seems unlikely to be purely a coincidence. This may be another reason the dollar store bosses have been pushing for a higher mix of consumables: few people buy groceries drop shipped by slow boat from China.

If this view does have some meaningful explanatory power, then the recent announcement of intent to eliminate (or even reduce) the $800 duty- and tax-free "de minimis" exemption of small imports is VERY good news for the bricks and mortar discount sellers: the dollar stores. The tariffs aren't great, but (a) only a fraction of the discount inventory is imported and subject to duties, and (b) the buying power is largely restored by the recent rise in the US dollar.

Jim

The market share of Temu among discount shopping (low income households) has gone from nothing to 17% since 2022. In the same measure and same time frame, the market share of DG fell from 63% to 52%, and Dollar Tree fell from 25.5% to 19.5%, a drop of 15% between the two of them. It's a different kind of shopping for household goods or clothes or toys, but it's coming from the same pool of shopping money, so the striking symmetry of the market share changes seems unlikely to be purely a coincidence. This may be another reason the dollar store bosses have been pushing for a higher mix of consumables: few people buy groceries drop shipped by slow boat from China.

If this view does have some meaningful explanatory power, then the recent announcement of intent to eliminate (or even reduce) the $800 duty- and tax-free "de minimis" exemption of small imports is VERY good news for the bricks and mortar discount sellers: the dollar stores. The tariffs aren't great, but (a) only a fraction of the discount inventory is imported and subject to duties, and (b) the buying power is largely restored by the recent rise in the US dollar.


That's an interesting hypothesis: Temu has stolen its 17% share from the dollar stores, and might get some of it back. And it's the profitable 19% of their business, not the unprofitable 81% which is consumables (2023 AR).

But I'm not entirely convinced that people that have taken to getting Chinese junk delivered to them by mail are going to go back to buying the much less exotic junk in person in a dingy DG store. Have people really been buying toilet bowl brushes and paper towels on Temu, or are they buying one of the 2 million SKUs (distinct inventory items) that they can find on Temu?

Currently, de minimis parcels are consolidated so that customs can clear hundreds or thousands of shipments at once, but they will now require individual clearances, significantly increasing the burden for postal services, brokers and customs agents, Cori said.
The provision was initially intended as a way to streamline trade, and its use has surged with the increase in online shopping, fueling the growth of fast-fashion retailers Shein and online dollar-store Temu, both of which sell products ranging from toys to smartphones.
The two firms together likely accounted for more than 30% of all packages shipped to the United States each day under the provision, according to a June 2023 U.S. congressional committee report on China that also found nearly half of all packages shipped under de minimis come from China. https://www.reuters.com/world/us/us-postal-service...

I guess it would be important to know how much duty DG has been paying on imports (almost half of which from China). Does anyone know what the number has been, in the last few years? Given that this duty was not charged on packages less than $800, that would have tilted the playing field towards buying stuff online, and away from the dollar stores. But it seems to me like if it's a low number, like 10%, that might not be enough to really make much of a difference. The big attraction with online purchases is not just the low price, it's also the convenience and especially the variety of items that you have access to. I have a hard time imagining that customers that have become accustomed to buying things online are going to go back to buying things in stores unless the price difference is a lot more than 10%.

I think people are following Buffett's too closely (e.g., buying OXY ; selling APPL, BYD). He's playing a difficult game given his circle of knowledge (everyone has limitations) and the size of his portfolio. People try to imitate him blindly but they often got the wrong perspectives.

BYD on a tear. Have continued to buy since Jan '24, now up 73% and becomes my 7th largest position.

Rough benchmark ... HSI up 32% over 1 year.

To me, the likelihood of imminent gutting of SNAP and income support programs by the newly installed regime is a significant concern.

To the point above: The $800 threshold removes a lot of the burdens that go along with customs reporting. The result has been relatively frictionless individual deliveries to U.S. consumers, often with little and predictable waiting time.

The cost to U.S. consumers by the eventual removal of de minimumus will therefore go beyond the duty to paid. It includes the administrative cost of increased customs reporting & the increased delay and unpredictability that follows from these administrative burdens. Shein/TEMU are already moving to get around this by increasing their U.S. presence, and I'm sure they'll have some success, but the free lunch is almost over.

The likely result for China-sourced products will be price increases above the duty paid, and the removal of large swaths of low-ticket items that aren't worth the customs hassle of shipping.

See: https://archive.ph/vichC ("Temu and Shein Raised Prices, Removed Products as Trump’s China Tariffs Went Into Effect")

Shi, a Chinese seller of arts and crafts products on Temu who asked only to use his surname for privacy reasons, tells WIRED that the company raised prices on his goods by 50 percent this week, while the number of orders he received on Friday decreased by about 30 percent compared to normal. Temu also made some of his products temporarily unavailable on the platform, but he says that he expects them to come back later.

Unlike eBay and other ecommerce sites, Temu controls the prices consumers pay for products, rather than allow sellers to set them. Shi says that, at least for now, Temu is continuing to pay sellers the same wholesale prices for his goods as it usually does. Temu generally doesn’t notify him of price hikes, and in this case, he says it hasn’t communicated about what the platform is doing to combat the tariffs. He adds that shipping speeds have slowed down, too. ...

Lorianna Calhoun, a Shein shopper, tells WIRED that of the roughly 170 items that were once on her Shein wish list, 40 now appear to be unavailable.



Whether DG can get some of these discount dollars remains to be seen. My guess is their recent announcement of moving into the same-day delivery space (the writing on de minimus was on the wall, including due to Biden's Sept announcement, when they made the early December announcement re same day delivery) suggests they think they can, but that they can't rely on in store sales to get there.

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