Halls of Shrewd'm / US Policy❤
No. of Recommendations: 2
No. of Recommendations: 2
Seems the author is saying it's hard to make a buck at the bottom of the retail market right now for lots of reasons. That makes sense to me (which is why I haven't had any interest in DG.) The top of the retail market looks better: WSM and CPRI are two that have done well for me recently: you can't go wrong with cooking and fashion. Looking at the middle of the economy, COST remains strong but CVS not so much. I thought both would outpace inflation, but it looks like I was only half right. We'll see.
I notice BRK doesn't invest much in retail equities, but they still own Borsheim's don't they? What about Pampered Chef? Nebraska Furniture Mart? Fruit of the Loom and Justin Brands? Anyone know how those companies are doing? Are their earning even reported anymore?
abromber
No. of Recommendations: 22
It's an odd article. It makes a very compelling narrative, but I just can't find a way to agree with all that much of it.
A lot of it is built on the macroeconomic situation rather than the company's specific situation.
That's not a problem as such, but consider his "nut paragraph":
"Fundamentally, the US is not struggling with low consumer demand due to cyclical changes in the credit cycle, as did during all "Great Moderation period" recessions. Instead, the US (and its Western peers) face weakened consumer demand due to prices rising faster than wages."
The problem with this is that it's not correct. Median real US wages are up 0.8% in the last year, and 0.9%/year in the last three.
(FRED database "Employed full time: Median usual weekly real earnings: Wage and salary workers: 16 years and over")
Median earnings are down from the transient pandemic spike, but ignoring that, it's right on track to continue the uptrend since about 2014.
That continuing trend is actually quite an improvement, after having been net flat roughly 2002-2014.
He also goes down the "inflation is being understated" conspiracy rat hole, claiming inflation is really around 8%. But...no.
I have concluded that the UIG is a much better measure of monetary inflation (what the general purpose purchasing power of a dollar is doing) than either CPI or tinfoil-hat numbers.
The NY Fed does a big calculation based on the notion that the change in the price of any one thing is a mix of a single global rate of change, plus a factor purely specific to that one product or service.
After crunching through the data, they can tease out the one global factor from all the item-specific idiosyncratic factors, which they call the Underlying Inflation Gauge or UIG.
Using this method, the best fit trailing year "common" inflation rate is either 2.27% or 2.98%, depending on whether or not they include monetary factors other than straight-up prices.
Now, it's not in doubt that a lot of people are hurting financially--gasoline might be only one price, but it's an important one But I see the income shortfall primarily as the early onset symptoms of a recession, not built on out-of-control inflation.
Rather, the headline CPI inflation numbers are jumping around because some individual components are seeing large item-specific price swings. Though those one-item price swings are real and affect people, they tend not to be lasting. Mostly.
The main downside of the UIG from my point of view is that unfortunately it is only (and can be only) a year-on-year rate. There is no absolute-level index that could be used to adjust prices through history as with CPI, where the "I" stands for "index".
Jim
No. of Recommendations: 7
I've read various analyses of DG arguing that it's a 'buy', and have bought DG stock based on those analyses. I've also visited DG stores in a few rural areas (OK, 'a few' is not a lot of data) and have seen the issues noted by others including stock carts that block the aisles, piled up inventory in back corners, poorly labeled aisles, etc. My reaction was "I wouldn't want to shop there". But I'm not poor so I don't have to (also worth mentioning is that these are fixable issues).
A question that arises is: what do their customers do during hard economic times and how does this change profitability of Dollar General? If DG is the only game in town then doesn't their business stay the same, or even improve during downturns?
I don't know, but I'd guess that a certain fraction of their customers wouldn't suddenly start driving an hour to stock up at the nearest Walmart, or pay to order stuff from Amazon. My guess is that, if necessary, you'd dilute laundry detergent with water, you'd gravitate towards even lower priced brands, you'd buy lots of Hamburger Helper, i.e. do things to reduce your cash outflow. The effect would be to reduce DG's revenue.
There's only so much juice that can be squeezed from a lemon. I'm long DG, but view it as a gamble.
No. of Recommendations: 0
No. of Recommendations: 17
Along the same lines, a researcher found that prices were actually cheaper at Whole Foods than at nearby industrial-scale supermarkets.
The impression of expense at Whole Foods comes more from the lack of low-priced products in a category and the multiplicity of high priced products in a category.
For head-to-head of the exact same item, Whole Foods generally came out cheaper.
They cited the example of frozen orange juice concentrate, which was the high end alternative at the monster supermarket but the low end option at Whole Foods, who would also squeeze you stuff to order.
The study was done a while ago, so the result may be a little different.
Either way, it's a nice reminder of the importance of range selection.
I always liked the story of strategic restaurant menu design.
Lots of dishes at (say) around $25. Steak at $40, and lobster at $60.
The lobster isn't there to be sold, it's there to make the steak look cheap--the goal being to sell lots of $40 steaks instead of the humdrum $25 dishes.
Jim
No. of Recommendations: 5
I think some of this can be explained by competition.
Within 5 miles of my home, I have Whole Foods, Acme, Costco, Wegmans, Aldi, Giant, Trader Joes, Target, Wal Mart and some others. Me and the wife frequent most of them within an average month and we know who has the best prices on most items we buy.
I imagine your average DG customer has much less competition and maybe the means to get to them easily so stores have more pricing power.
I avoided investing in DG because I haven't been in one and I thought the Debt/Equity Ratio was too high. I like the old Peter Lynch rule of 80% or less.
No. of Recommendations: 0
No. of Recommendations: 2
I always liked the story of strategic restaurant menu design.
Lots of dishes at (say) around $25. Steak at $40, and lobster at $60.
The lobster isn't there to be sold, it's there to make the steak look cheap--the goal being to sell lots of $40 steaks instead of the humdrum $25 dishes.
Jim
And something like a Caesar Salad which, around here, is nothing more than lettuce, cheese, some croutons and dressing might go for $10-15 and throw some chicken on it and it is $17-20 while you can get a large chicken sandwich for $15 or less and that might include tomatoes.
No. of Recommendations: 0
With a 35 year career in marketing and communications, I love reading strategies like this.
A madness for every method. Thanks for that one, Jim.
m
No. of Recommendations: 2
No. of Recommendations: 5
I read the linked article and didn't think it was very good trying to make broad economic predictions and apply it to DG. Jim pointed out factual errors and called 'It's an odd article.' So not a good article.
DG's share price has had a precipitous decline, now at about 40% of the high.
The store conditions can be improved with effort if management cares. Staffing and store management doesn't look to be in crisis. Inventory magnitude and turn can be managed. Inflation and interest rates are problems but the rate of change has slowed. We will have to see if they can keep profit margins and debt manageable. A collapse in sales seems unlikely.
I bought at $125 and again at $114. The price now looks in a local minimum. It can always go lower.
