Despite Dollar General’s Struggles, Don’t Panic (NYSE:DG)

Dollar overview

Discount retail is a tough game – when things are good, consumers tend to shop by going to bigger, more expensive stores. When times are not so good, the primary consumer can become stretched to the point where they are gone buying in the quantity they used to, even from you (the low-cost retailer). This is the story of Dollar General (NYSE:DG), discount shopping powerhouse and the nation’s largest retailer by number of locations.

When we last covered Dollar General (you can read that article here ), the company was going through a bit of a shakeup. The one-year CEO resigned and the former CEO returned to the company amid disappointing quarterly results and reduced expected guidance.

Since then…well…things haven’t turned out exactly as I’d hoped, to say the least.

If the graphic above makes you go “oof”, it does the same for us. Since August 2023, Dollar General is down 48% on a total return basis, while the S&P 500 ( SPY ) has gained 24% over the same time frame.

So… is the worst over for Dollar General? The franchise’s place in the firmament of rural and discount retail seems secure enough, so has the stock fallen low enough to be a real bargain today, or is it better to turn tail and run?

Let’s dive in.

Stock assessment and DG performance

Let’s start with where the stock is today.

Today, on a forward basis, Dollar General is currently hitting five-year lows. With a forward P/E of just 14.5x and EV/EBITDA of 12.2x, Dollar General is much cheaper on the face of it than behemoth Walmart (WMT), which has a forward P/E of 31x as of this writing, but it retains a slight edge over its competitor, Dollar Tree ( DLTR ), which today has a forward P/E of 12.3x and an EV/EBITDA of 9.2x.

Last quarter wasn’t great, as executives pointed out that consumers were “need-buying” rather than “want-buying,” a way of saying that consumers are exhibiting belt-tightening behavior that hurts the top line and squeezes the bottom line. down. . That translated to a $0.09 loss in GAAP EPS for the quarter ended July 31, sending the stock down 32% on the day.

The next obvious question is: has the market overreacted?

To answer this question, we turn to analysts’ estimates, which are quite gloomy.

In January 2023, the analyst consensus at Dollar General was for $43 billion in FY2025, followed by $46 billion in FY2026. After a string of negative quarters, however, those estimates have dropped significantly, as illustrated above, to $40 billion and $42 billion, respectively.

So what are we to make of it? Does the drop in expectations with a corresponding drop in value make Dollar General an interesting value play? Let’s see what management has to say about the situation.

The management part

Earlier this month, CEO Todd Vasos and several other executives spoke at the annual Goldman Sachs Global Retailing Conference. After reviewing their comments, one particular section caught our attention. Here’s Vasos breaking down what’s currently happening with Dollar General’s main customer and offering insight into last quarter’s lackluster results:

We’re probably as close to our customers as any retailer that understands and probably the closest to that low-end consumer of any retailer out there. And what she specifically told us for Q2 was that although I’m still gainfully employed, second job, and let me qualify that when times are good, our main client works in normally 30 to 40 hours a week, but also has a side job. job where they normally work 15 to 25 hours.

What she told us in Q2 was that it was disappearing or gone. And I think that was the factor that contributed to the even tighter financial constraints that she was already feeling, you have to remember, while inflation moderated — year-over-year in recent quarters, which hasn’t gone away . it’s that cumulative effect of 20 percent inflation over the last few years, right, especially on what grocers call the downtown store, but we just call our core staples. They didn’t deflate, did they? And that continues to be a real headwind.

That statement from Vasos seems to have a lot of explanatory power for Dollar General’s woes: Core consumers are struggling to make ends meet, and inflationary headwinds have proven stubborn in the sales categories that matter most.

Risks and possible advantages

The biggest risk we see for Dollar General is the continuation of stubborn inflation and its impact on the company’s consumer base (as detailed above). While inflation appears to be starting to ease, it’s not just puppies and sunshine out there – consumers continue to feel the need for higher prices. Recently, 56% of middle-class adults said they felt like they were living paycheck to paycheck. That number is certainly much higher for lower-income families, and if that sentiment doesn’t abate, it’s likely to continue.

We think the Fed rate cut (which is expected at this point) could offset some of the pressure facing Dollar General’s primary consumer.

Putting it all together

It’s time to put the obvious truth out there – Dollar General has a scary looking chart and there isn’t much conviction right now for the stock. Let’s recap a few things:

1. The stock is currently in the bottom quartile of its valuation range over the past 5 years.
2. The stock was absolutely destroyed by the market, on the verge of being left for dead.
3. History tells us that eventually bad economic conditions improve as we go through normal cycles.

All of this is, we think, a compelling case to keep a close eye on Dollar General for a comeback when their core consumer feels a little more relaxed. Is that any consolation to those who have held on to Dollar General during this tumultuous time? Probably not. But we continue to believe that better days are ahead – remember, Dollar General is not a victim of new competition, has not lost its competitive edge, and is not falling out of favor. Instead, he is the victim of an economic constraint that is almost beyond his control.