2023-11-21 04:40:47 ET
Summary
- Dollar General's stock has dropped almost 55% in the past year, leading to concerns about the company's future.
- The company's revenue growth has been stagnant, and its bottom line has seen a significant decline.
- DG's strategy of expanding store locations and entering international markets does not address the underlying issue of consumer preference shifting to direct-to-consumer formats.
Dollar General ( DG ) is a leading retailer in the United States by number of stores with over 19,000 locations spread across 47 states. Dollar General is a publicly listed discount retailer and trades within the consumer discretionary sector. Originally founded in 1939, under the name, "J.L. Turner and Son, Wholesale" Dollar General has a longstanding history within retail and has continuously operated for 84 years. DG has been publicly listed since 1968 aside from a 2-year stint beginning in 2007 when DG merged with an entity associated with KKR, who has since sold their shares of common stock.
This year, Dollar General has seen revenue growth dwindling along with a significant drop in its bottom line. In my opinion, investors are becoming increasingly cautious, with many losing faith in the company entirely. The company's stock is down almost 55% since the same time last year, which has left many wondering whether DG can recover or if this is the beginning of the end for the discount retailer.
Despite Dollar General's significant drop in price over the last 12 months, investing in DG carries significant risk as its forward strategy does not properly address the troubles that began its downfall. DG's emphasis on additional store locations and international markets will not be enough to address the underlying issue at heart, mainly a consumer preference shift to direct-to-consumer formats.
Overview
Dollar General locations offer a broad base of lower and middle income shoppers with general merchandise options including consumables, apparel, seasonal items and home products. Consumables make up the majority of DG's sales while apparel only brings in a sliver of annual revenues. DG's inventory includes brand names as well as their own private label options at a discounted price. They sell everyday necessities primarily in small box formats through their thousands of store locations. DG drives demand through convenience both in their inventory lineup and store make-up as well as through their strategically placed store locations. Dollar General's stores can be easily found throughout the US but are particularly concentrated in the Southern, Southwestern, Midwestern and Eastern United States.
In fiscal 2022, Dollar General saw revenues of 37.8 million, up just 10% from fiscal 2022 ( annual report ). This growth is well below where DG had initially projected and has not impressed investors. Their bottom line has not seen any growth and falls below what DG was seeing 2 years prior. 2022 net income amounted to 2.4 million representing a profit margin of just 6.4%, considerably down from 2020 where they saw 2.65 million in profit and a subsequent 7.9% profit margin. DG has continuously reduced their guidance and has not met the expected top line or margin growth which they had forecasted to come from their 3000 store additions since 2020.
Dollar General's weak performance has resulted in missed earnings estimates in 4 of the last 5 quarters despite multiple instances of already lowered guidance. The most recent blow to their stock came with their updated FY 2023 guidance , which projects an EPS of $1.29, down from 2022 Q4 which saw an EPS of $2.33.
An increasing majority of their sales has been driven by consumables which made up 80% of fiscal 2022 sales, followed by seasonal (11%), home products (6%), and apparel (3%). DG sales are slightly seasonal and typically see a slight uptick in Q4 from holiday purchases.
Strategy
Dollar General's value proposition comes down to three main tenets.
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Everyday Low Prices on Quality Merchandise.
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Convenient Locations.
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Time-Saving Shopping Experience.
The heart of DG's business model is Convenience, Efficiency and Affordability. Their strategy attempts to provide their lower income target demographic with these three tenets while also growing margins and top line.
In practice, this means strategic store placement with a priority on lower income neighborhoods, proximity to public transport and lower leasing expenses. To maximize convenience for consumers, Dollar General offers a lineup of store formats: Dollar General, DG Market, pOpshelf, DGX, and Mi Super Dollar General. Each format appeals to specific consumer needs and markets allowing for a more tailored shopping experience.
Stores are designed to carry mainly just the essentials, meaning store formats are relatively smaller than many other retailers and that shoppers are more time effective in their shopping. Dollar General's inventory includes many of the brand names that shoppers can find at other retailers, but also over a dozen of their own discounted private brands.
Looking forward, Dollar General plans on growing their topline through additional store locations as well as remodeling and renovating current locations. Specifically, Dollar General hopes to leverage their newer (began in 2020) pOpshelf store format which offers a more upscale shopping experience compared to their traditional locations. The item offerings include: seasonal and home de?cor, health and beauty, home cleaning supplies, and party and entertainment goods which DG believes will help drive its top line and expand its total addressable market. During Q2 of this year, DG opened an additional 26 pOpshelf locations bringing the format total to 190 locations. Dollar General CEO Jeff Owen explains, "Looking ahead, we are taking a balanced approach to opening the right number of new pOpshelf stores in the right locations in this macroeconomic environment and expects to operate a total of approximately 230 stores by the end of 2023."
Dollar General also plans on expanding outside of existing markets. Earlier this year, DG opened its first Mi Super Dollar General location in Mexico and has seen a promising response thus far. DG CEO explains, "Our updated goal is to have up to 10 stores serving underserved communities in Northern Mexico by the end of 2023 as we look to leverage our brand awareness while extending our value and convenience proposition to a customer base that is similar to our core customer in the United States."
Finally, Dollar General also plans to grow their digital segment. They offer online pick-up and limited shipping opportunities for consumers through their website and have recently partnered with DoorDash ( DASH ) for convenient delivery options. DG has seen a 20% increase in monthly active users and management is bullish about the digital strategy which "consists of building an ecosystem specifically tailored to provide our customers with an even more convenient, frictionless, and personalized shopping experience, and we are pleased with the growing engagement we are seeing across our digital properties."
Despite their slowing topline growth and collapsing margins, management is confident in stating:
[Dollar General's] attractive store economics, including a relatively low initial investment and simple, low-cost operating model, and our variety of store formats have allowed us to grow our store base to current levels and provide us significant opportunities to continue our profitable store growth strategy."
Industry Position
Dollar General operates within a highly competitive industry. Discount retail sees extremely high price competition and results in compressed margins for all players. When looking at DG and its competitors, margins are low across the board. DG has a bottom line margin of just 5.6%, down from 8% in 2020. Dollar Tree and Five Below both hold 4.2% and 7.8% profit margins respectively. Dollar General trades at a discount when compared to its peers but it also carries a deteriorating revenue growth rate and compressed margins. The industry as a whole has suffered tremendously on the market.
Last month, Dollar General announced that CEO Jeff Owen would be stepping down from his position and would be replaced by former CEO Todd Vasos who previously held the position from 2015 to November 2022. Jeff Owen's CEO stint lasted less than a year and came with less than desirable stock return and company fundamentals. His stepping down resulted in a 10% jump in share price at the opening. This speaks to the lack of confidence that shareholders had in management and their trust in Todd Vasos. Despite the change-up in management, the stock remains inherently flawed and in an industry with strong headwinds.
Dollar General recently narrowed full-year guidance metrics. Sales growth was adjusted to 1.5% - 2.5%, compared with the previous 1.3% - 3.3% range. Same-store sales were narrowed to flat to -1% from the original -1% range. EPS is now projected to be down 29% - 34% from the year earlier.
Competition
Ultimately, the biggest risk for the stock comes from industry headwinds. The discounted retail industry holds extreme competition from players within, but most of all from Direct to Consumer alternatives. Dollar General's business model and value proposition come entirely from the convenience it provides to consumers. But, as e-commerce retailers continue to develop their distribution networks and optimize same-day delivery channels, non-destination retailers will continue to struggle to maintain margins and grow revenue. We are already seeing this in DG's fundamentals. DG has been unable to maintain the same sales per store metrics as pre-covid. During the pandemic, consumer sentiment largely shifted towards direct-to-consumer from brick-and-mortar retail.
Dollar General's strategy does not adequately address this challenge as they continue to open the same location formats across the country and into new markets. The new CEO may help to slow top-line deterioration, but it seems almost inevitable in my opinion, due to the bigger-picture dynamics which are out of the company's control. A few things to watch for that would signal DG's price deterioration would include a failure to recover margins, slowing growth in the digital segment, and a failure to grab on in the Mexican market.
Final Thoughts
The industry is facing severe headwinds and I believe Dollar General is not properly orienting itself to face the challenge. Instead of repositioning to confront the ecommerce competition, DG is ramping up its existing brick-and-mortar locations and not doing enough for digital channels. The convenience and affordability that they provide customers simply cannot and will not match that offered by Amazon (AMZN) or DTC distributors. Therefore, despite the 55% drop in price YoY, I believe that DG is a sell in the long term.
For further details see:
Dollar General: Growing Risk And Shrinking Opportunity