No. of Recommendations: 5
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.
