No. of Recommendations: 7
I noticed Chris Bloomstran has really increased his DG position to #2 in his Semper Augustus portfolio per his most recent letter (from over 1% to now 10%) and he also mentioned his belief in DG on the recent Value After Hours podcast earlier this week. He has owned and followed them closely for years and glad he also has strong optimism in management and execution of their vision going forward. He mentions them on p.20 of his 2023 client letter.
I am having trouble convincing myself to reinvest in this company, and so I was hoping for a little more on Bloomstram's reasons for optimism. He basically says the company 'overearned' during COVID, but that last year's 30% drop in earnings was "mostly temporary", and he figures that what he calls 'normalized' earnings are less than 2023 but much less of a drop than 30%. EPS in 2022 was $10.68, and in 2023 was $7.55 (down 29.3%), so let's say for the sake of the argument that earnings might rebound 2/3 of the way to $10.68. That would put them at $8.59, probably not before 2025, since the company has said they expect 2024 earnings of $6.80 to $7.55. (By 2024 earnings, I mean this year, which they call 2025 because the year begins on Feb 1st. We are already in fiscal year 2025 for DG).
That doesn't seem crazy: they may be able to stem the theft problem with less self-checkout, and it should help that their competitor is closing a lot of Family Dollar stores.
If they can get back to $8.59 per share, hat would mean that today's $150.78 closing price represents just under 18x 2025 earnings.
I don't find that quite attractive enough to reinvest here. I bought some around $110 and sold it all around $130 to buy something I liked better (Carmax), at about the same current multiple. Both should rebound after what was a bad year for both, but I like the long-term propects of Carmax better. They have less than 4% of the used car market, with lots of room for growth, whereas DG already dominates in their niche (along with Dollar Tree). Both are limited to the US, but I think Carmax could expand into other countries whereas I doubt DG could. DG may be able to correct some of theft problem, but they are going against a headwind of more social acceptance of theft and less strenuous application of the law, something Carmax does not really have to worry about. DG has to worry about online sales (Amazon etc.) that are increasing in all income groups, and as they exapnd into consumables, they will be taking on the big grocers too, who typically have better prices.
And more generally, they are not the low-cost provider, the way successful companies like Amazon or Costco or Walmart are. It is important to have a company that can purchase and resell used vehicles at a fair price, but it is less clear that there is a long-term need for dollar stores - they seem more like a vestige of the past than a company with a bright future.
I would be interested again if the price fell back to $100-110 or so, but I like it more as a short-term trade than a long-term investment which I could buy and forget.
DTB
