No. of Recommendations: 6
Cross post from Falling Knives on a thread about DLTR:
Possible that both DLTR and DG are heading toward a better future.
DLTR is pulling back from a business that was harming them - the acquisition of Family Dollar. Closing stores there is a good thing for their business, improving their economics quickly. It's an improvement from where they were and probably a good thing that improves their long term prospects. But the valuations for DLTR doesn't suggest its a great deal, although better than it was before their earnings report drop.
DG earnings report was the mixed bag they have been reporting lately. Sales look okay and growth possible, but signaling operating margin pressure looking forward. But an interesting thing that wasn't factored in is the DLTR is also pulling back on Family Dollar and shutting some stores. I think FD competes more with Dollar General than the Dollar Tree brand. Could be wrong about that, but they are both focused more on smaller suburban and rural areas than DLTR seems to be. So DLTR's pull back on Family Dollar brand is good for them but maybe also good for DG by reducing competitive pressure. That might be a marginal benefit compared to everything else they are trying to do, so not something to bank on. But this move by DLTR feels like a move that improves the competitive economics for both companies.
None of this overcomes the risk from things like recession, or prolonged or increasing interest rates. But I am happy continuing to hold the DG that I do. Their valuation is reasonable, they pay a dividend, continue to show growth, and now just need to reduce the drivers of lower margin.
