Is Dollar General a Value Trap... or Value Investing? An Objective Data-Driven Analysis (Part 2)
Is Dollar General a Value Trap... or Value Investing? An Objective Data-Driven Analysis (Part 2)
If $DG's Operating Margins can recover back to historical levels, the potential upside is obvious. So is FY23 underperformance structural or cyclical? We quantify it here.
“We monitor the following five metrics of our new store portfolio, including performance against pro forma sales expectations; new store productivity compared to the mature store base; cannibalization, which overall has remained consistent and predictable; cash payback, which we continue to expect in 2 years or less; and new store returns, which we expect to be approximately 18% on average in 2024.” — Q3 2023 earnings call
“As our store teams have fewer SKUs to manage, we can lower our cost to serve, while driving higher inventory turns and higher sales of products that are most important to our customers.” — Q3 2023 earnings call
Chapters
Dollar General: Financial Background (Part 1)
Reasons Behind Recent ST Underperformance (-45% YTD) (Part 1)
$DG Fundamental Analysis: Business Level, Store Unit Economics & ROIC
Growth (Part 3)
Could DG 0.00%↑ Be Significantly Undervalued? Dollar General has a simple Retail business model, which makes the undervaluation thesis pretty simple. As this excellent bullish DG thesis explains, the entire thesis revolves around whether DG can recover back to its historical operating margin levels or not. This thesis is widely accepted by market consensus — the main point of contention is whether they can recover to their historical operating margins of 8-9% or not (latest: 4.4%). Essentially, the thesis points to DG historically being a lean, mean capital allocation machine — and if their recent underperformance is just a cyclical blip (ala $INTC), it would soundly justify their current normalized PE of just 9.5x.
Or Could It Be a Value Trap? However, it they cannot recover back to their historical operating margins, then obviously their trailing PE of 15.7x is a much harder sell. And there are good reasons to believe that DG’s latest underperformance may be structural. Notable examples include softer comps, higher shrink due to labor issues, the fading one-time pandemic boost from SNAP and tax rebates, structurally higher inflation going forward; and perhaps most pressingly, the appearance of DG’s legendary ex-CEO Rick Dreiling at their biggest competitor, Dollar Tree. Dreiling earned his renown for implementing the ‘Dreiling Playbook’ when he was CEO of Dollar General from 2008-2015, where he made DG the retail beast that it is today.
So Who’s Right? Given that DG 0.00%↑’s -45% share price performance YTD has been largely due to its misses in 2023, its entire valuation hinges on whether DG’s FY23 underperformance is structural or cyclical. In this report, we’ll use a highly objective data-driven approach to uncover the truth behind this question.
ST Underperformance Misses LT Perspective: Nearly everything I’ve read on DG thus far (including from bulge bracket sellside) focuses myopically on only the latest ST underperformance of their past few years — as usual, Mr Market is squawking and extrapolating 2023’s ST trends into perpetuity again. I have yet to come across a recently updated DG deep-dive analysis which looks at the company the way a LT investor or DG management might — by zooming out to see its entire LT historical performance over the past decade, and then working back towards the present-day to interpret their future trajectory, with past trend performance as crucial context. This is highly relevant because, IMHO, it is hard for anyone who has actually analyzed DG through the lens of its LT historical financial statements to not see things differently from market consensus — its LT trends tell a completely different story from ST trends.
📈 10+10 Years Deep-Dive, Through The Numbers: In this report, we’ll be doing what you’ll be hard-pressed to find nearly anywhere else — a single report which analyzes DG’s historical long-term performance over the past 10 years (lots of charts 📊), and uses that as context to inform DG’s performance trajectory over the next 10 years. By the end of this report, we’ll also intimately understand the reasons behind their recent ST underperformance YTD, and get a 360° view into the future trajectory of their Operating Margins.
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Click the links below to read our Parts 1 and 3 reports!
$DG Fundamental Analysis: Business Level, Store Unit Economics & ROIC
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