No. of Recommendations: 27
I'm still reviewing my DG position, and I've been reviewing DG's ups and downs over the years to that end. Those familiar with the price history will recall that DG had a major dip in August 2016 (from the mid $90s down to the high $60s), subsequent to its 2016 2Q report. Many of DG's challenges at the time resembled difficulties it is facing today:
In FY 2016, Wal-Mart was engaging in aggressive price cuts to draw traffic, whilst DG/WMT consumers were facing macro challenges. SNAP deductions were hitting the modal DG consumer. DG was ultimately compelled to 'invest' in labour, late in FY2016:
https://fortune.com/2016/09/15/dollar-general-hiri.... There was still talk of Amazon destroying all brick and mortar. One of the results going forward was step down in operating margins, and an increase in SG&A costs relative to sales. From 2014-2016, DG had average operating margins of 9.45%; from 2017-2019, the average dropped to 8.4%. Relatedly, during these same periods, SG&A expenses were 21.4% versus 22.1%, respectively. In its 2016 3Q report, the firm's challenges were summarized:
"The challenging retail environment that we experienced in the 2016 second quarter continued into the third quarter, contributing to weakness in our same-store sales and our financial performance. In the 2016 third quarter, we invested in gross margin with the goal of driving traffic and sales over time. Many of these actions are gaining traction with our core customers, and we are encouraged by the early results. As expected, the full benefit on our same-store sales will not be immediate. In addition, we saw an acceleration in headwinds from average unit retail price deflation and reductions in SNAP benefits in the 2016 third quarter as compared to the 2016 second quarter. We are focused on efforts to drive traffic in our stores and to control the factors we can control as we look to overcome the issues impacting our results, many of which we believe are macroeconomic and transitory in nature," said Todd Vasos, Dollar General's chief executive officer.
The increase in SG&A costs, to 22.5% in Q3, was attributed to an increase in "retail labour and occupancy" costs.
The stock was mostly dead money for about 6 months before things turned around in 2017. The profitability of Dollar General was then further aided by the large cut in taxes, with the federal rate dropping from 35% to 21% (where it stands today).
In his 2021 letter, Bloomstran describes his buy thesis in 2017, and the decision to trim his holdings as the share price shot up during COVID:
https://static.fmgsuite.com/media/documents/db64b9... (see pages 8 - 10. A very high-level overview of the Bloomstran 2017-18 buy thesis can be found here:
https://moiglobal.com/dollar-general-201801/. As an aside: in January 2018, when the above was published, the stock was trading around $100 (with a share count about 20% above its current count), i.e., a stone's throw from today's price. Bloomstran was re-purchasing Dollar General, heavily, subsequent to the Q1 swoon:
https://www.theinvestorspodcast.com/richer-wiser-h....
I don't mean to draw an exact comparison between the two time periods. There are a number additional differences to the downside between then and now, some of which aren't minor. For instance, the new CEO/CFO has had execution issues (e.g., on the supply and inventory front), and their ability to right the ship is still unproven; debt has ballooned to $7 billion, and the rise in interest rates has begun to increase interest expenses further; safety issues have intensified; there is risk of a moderate tax increase; hourly wages have gone up, and there are further challenges in today's tight labour market (e.g., see Wal-Mart's recent wage hikes, which are surely intended to further out-compete DG on labour), etc.
But a tour through the 2016 and 2017 reporting sure has a lot in it that is quite similar to what we're hearing today.
