DG - Dollar General Appoints A New CEO Are Shares A Buy?

2023-10-13 12:58:09 ET

Summary

• On Thursday, Dollar General announced that current Board member, Todd Vasos, has been appointed CEO.
• Vasos’ return marks his second stint as CEO following a past tenure that began in 2015.
• During that time, DG shares outperformed and reported outsized revenue growth.
• While his return can be viewed as a positive, I believe it comes at a challenging time for the company.
• Any resulting turnaround effort may set the company further behind peer, Dollar Tree, who is further along in their own transformation.

Dollar General ( DG ) received a much-needed uplift on Friday following news that it was bringing back current Board member, Todd Vasos, back to his role as CEO. The announcement sent shares up nearly 8% in extended trading on Thursday. And the stock retained those gains through the early morning hours on Friday.

The positive sentiment follows a year in which shares have been beaten down by over 50%, most on a YTD basis. Prior to the news, the stock was trading around its 52-week lows.

Like their close competitor, Dollar Tree ( DLTR ), DG hopes a change at the top can turnaround their recent woes. While I view the change as a positive, I believe this will set DG back in the near-medium term in relation to DLTR, which, in my view, is further along in their turnaround efforts.

How Does Dollar General’s Current Share Price Performance Compare With Dollar Tree?

DG has significantly trailed their peer, DLTR, over the past year. While both stocks are in the negative, DLTR’s losses are about half that incurred by DG. It marks a notable turnaround from a few years ago, when DG was by and large the favorite among investors in the dollar store arena.

From 2016 to late 2021, for example, shares in DG returned over 200% compared to a relatively paltry 40% from DLTR. The share price performance was also accompanied with a compound average revenue growth rate of 11.3% compared to DLTR’s 5.3%.

It’s not a surprise, then, that activist investor, Mantle Ridge, began swirling around DLTR in November 2021. And at that time, it was reported that the activist was working with current DLTR CEO and former head of DG, Rick Dreiling, to shake up DLTR.

Since then, DLTR has embarked on a transformation, one that has been viewed favorably by Wall Street over the last few years. From November 2021 to the beginning of 2023, DLTR has outperformed DG, with gains of nearly 30% compared to 11.5% from their counterpart.

Why Did Dollar General Need A Change In Leadership?

DG hopes to capture the same enthusiasm that DLTR realized when they made their changes. Aside from this, DG’s results this year have been simply unacceptable. Following Q1 results, shares plummeted nearly 20%, their worst daily drop in history. This came after the company reported growth in comparable store sales of just 1.6% compared to estimates of 3.8%.

Then in Q2, DG shed another 14% following another weak quarter that was accompanied by a guidance cut. The quarter also marked DG’s fourth consecutive quarter of missing topline estimates and the second straight quarter of missing at the bottom line.

Compared to DLTR, which has been making significant strides under Rick Dreiling, DG has been plagued by under-investment in their stores, particularly around the labor front. This has left many stores in deteriorating condition, while also leaving them more exposed to theft.

Price increases made over the pandemic also exposed DG to greater customer pushback, especially since their base tends to be more price sensitive. Peer, DLTR, on the other hand, has been cutting prices in recent periods to be more competitive.

Given the many shortcomings, one could say the time was ripe for change.

Who Is Todd Vasos?

Todd Vasos first joined DG in 2008 as their merchandising chief. He was then tapped as CEO in 2015 after serving as Chief Operating Officer since 2013. His appointment followed the retirement of then CEO Rick Dreiling, the same Dreiling that now heads Dollar Tree.

During his tenure as Chief Executive, Vasos was credited with overseeing the addition of approximately 7K new DG locations, primarily in rural communities across the U.S. Furthermore, he also introduced new product categories, such as more fresh produce. His leadership efforts contributed to revenue growth of more than 80% during his tenure.

His tenure was also marked with a period of outperformance in relation to peer, DLTR, especially after DG lost its bid to buy Family Dollar. In hindsight, the loss likely benefited DG, as DLTR has had past struggles in integrating the smaller chain into its business.

The announcement to bring back Vasos is being seen as a way to “ restore stability and confidence in the company moving forward ,” according to Chairman, Michael Calbert.

Is DG Stock A Buy, Sell, Or Hold Following The Leadership Announcement?

I view DG as a hold, despite the positive commentary and sentiment surrounding the leadership change. Analysts at Jefferies noted that Vasos had a strong record during his past leadership tenure. Bank of America, meanwhile, remained more cautious but expressed optimism that the leadership change could provide an offset to DG’s current struggles.

While I agree, I believe the change comes at a time when the company is greatly underperforming their peer, DLTR. DLTR is also further along in their own transformation efforts. Any significant changes put in place by Vasos will likely only put the company further behind in the near to medium term.

As a current Board member, the transition may prove quicker and may result in less disruption. But I’d be wary of becoming overly bullish on DG. Shares do trade at a discount to DLTR in terms of their earnings multiple. But their current results warrant a discount, in my view. The company did revise higher their expected net sales growth at the low end of their range from 1.3% previously to 1.5%. But they also reduced the top end to 2.5% from 3.3%. In addition, they reduced their growth expectations for same-store sales to 0%.

All considered, I view shares in DG as best kept on hold until it can begin turning positive news into positive results.

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