No. of Recommendations: 5
Clearly there are Bull and Bear cases - I personally like to hear both - so thank you to those that are contributing.
Bull : Return of operating margin is likely
Bear : Structural issues will be very difficult to fix
I am on the Bull side; but I am also skeptical; which is why I have limited my position size.
Note:
1) Its not productive to call people stupid or "followers" just because they agree with one side or the other.
2) I REALLY appreciate when new ideas are brought to the group and reverting to [1] discourages this.
tecmo
...
No. of Recommendations: 13
I'm bullish, and every so slightly more so after the CEO changeup. In his short tenure, Owen made apparent mistakes (see, e.g., repeated failures on guidance); he appeared to be unwilling or unable to address the comps issue & changing customer behavior until very late in the game (see inventory); and he otherwise appeared overwhelmed and prone to platitudes/corporate speak. The Board and Vasos own some of this problem, it was their guy, but the negative was on them before the change. I think Vasos is capable, if not perfect.
I also prefer a Board that does not dither on a problem -- Owen very likely wasn't the answer, nothing in his performance as CEO suggested he was, and better to remedy the issue sooner than later. Would DG have been fine with him in the role? I think so. But Vasos strikes me as an upgrade, despite the cost.
Regardless, all of this strikes me as obsessing with the trees rather than the forest. A new substack makes the buy case better than I:
https://pyrrhusvalue.substack.com/p/dollar-generalA small snippet:
Of course naively extrapolating the past can't be everything. Market and companies change. But when you see a long period of stability and customer behavior, it has to be weighted. What I currently see in the stock is near 100% weighting of the specifics of the recent past with very limited weighting of the base rate.
I start with these points to have more perspective on the longer term in the business being a good one if purchased at an attractive price. They have a moat that hasn't changed because Walmart is investing in Ecom or comps have underperformed the last few quarters or inventory is (way) too high or management is (Maybe?) partly in denial or slow to respond on the issues.
[...]
At the end of the day only a few things matter for returns to be 10% or better
1. Can they open new stores for at least five years (and comp sales not persistently negative)
2. Are EBIT margins going to be above 7%
3. Will it trade at least at 13x earnings
More importantly to me, to lose money you'd need to believe
1. They never open another store
2. EBIT margins are 6% or below
3. It trades at 11x or less
It'd lean towards mid-teens returns through a combination of 5% sales growth, 8% EBIT margins, 3% share reduction, and trading at 15x earnings.
That's the upshot. The piece is well worth the read.
No. of Recommendations: 9
I usually enjoy rational walk's analyses, but I didn't find his DG one convincing. I'd have thought that a potential long-term macro trend, like inflation, is harder for DG to handle than fixing a management issue where prompt personnel action can address an internal isolated problem. DG generates profit from a target customer base on the lower rungs of the income ladder, so macro trends like inflation can make it very hard for DG to squeeze profit out of customers who just don't have the money.
I view Buffet's quote, "I try to buy stock in businesses that are so wonderful that an idiot can run them, because sooner or later one will", in the same vein as Buffet expressing that his favorite hold time is "forever". Perhaps a distillation for the masses of his ideas/preferences/suggestions, but Buffet certainly does sell stock positions, and sometimes not long after entering them, presumably having realized that the initial decision was a mistake. In the same vein, personnel decisions, such as a new CEO, can be a mistake and when that's recognized, you fix it. Buffet quotes are generally nice, but don't constitute a cogent, specific, argument. I don't think that replacing a CEO means that the DG business model is necessarily fragile (it may be fragile, but not for that reason). It makes sense (to me) that the wrong man in the top job at the wrong time can screw things up, and if that happens then the BOD needs to fix it. I took a leap on DG awhile back with a Jan 2016 DITM call (points for the pun!). It's of course way down right now, but there's plenty of time, so I guess I'm a bull that gambles (image of a long horn bull in cowboy hat at a black jack table in Las Vegas).
