No. of Recommendations: 10
Analyst note from Morningstar:
"Narrow-moat Dollar General delivered fiscal 2024 first-quarter results that slightly exceeded our expectations. However, we do not plan to significantly alter our $145 fair value estimate, as signs of intensifying price competition should remain a headwind to margins. The top line expanded 6% amid modest store growth and a 2.4% increase in same-store sales (ahead of our 1.5% forecast), an encouraging statistic driven by a 4% uptick in foot traffic. Sales growth was led by an 8% gain in the consumables category (over 80% of sales) while home products and apparel sales suffered declines of 10% and 2%, respectively. Management noted that its core low-income consumer continues to grapple with a tight shopping budget and cited increased demand for items around the $1 price point. With elevated price levels and abating fiscal stimulus (such as reduced SNAP benefits and tax credits), we expect Dollar General's sales to continue over-indexing to its consumables category throughout the remainder of the year and into fiscal 2025. While we do not foresee a quick amelioration in low-income shoppers' willingness to spend on nonessentials, we still think shoppers on a tight budget value the firm's assortment of individual consumable items at low absolute price points. As such, we plan to maintain our forecast for low-single-digit comp growth for fiscal 2024. The company's 5.5% operating margin was in line with our expectations and represented a 240-basis-point decline from the prior year. The bulk of the operating margin decline stemmed from continued headwinds related to shrink and inventory markdowns as management noted that promotional activity was mostly akin to prepandemic levels. We thought intensifying price competition was inevitable and continue to forecast a fiscal 2024 operating margin for Dollar General below 6% (versus 8.4% in 2019) as retailers increasingly rely on foot traffic to drive positive comp growth."
No. of Recommendations: 8
I don't like the small step backwards in operating margins (down to 5.5% from 5.9% quarter over quarter), or the continued trend towards consumables (everything but consumables keeps declining in sales), but I put back on some leverage at $127 and change (leverage via deep in the money 2026 calls).
I'm encouraged by the SSS rebound and the revenue growth. I am also of the view that the general bearish sentiment towards dollar stores over the last three months is missing the story that DG returned to "out compete your competitor" mode, and that DG's competition on price -- part of its dip on margins this quarter is due to markdowns -- is very likely part of what drove DLTR to dump a number of FDO stores and consider a FDO sale (compare margins and sales under Owen and Vasos, and I think Vasos is driving the long term concern of maintaining the DG monopolies that are scattered throughout rural America).
I think weakness in the sector generally (FIVE's earning call is worth a read) also suggests that some of the decline in discretionary sales is likely a cyclical weak consumer issue, as opposed to a long term trend. We'll see. But with the return to revenue and SSS growth, I see DG returning to $10 EPS in FY 2026 even if it can only hit 7% operating margins (still well below their pre-COVID averages).
Not expecting a quick rebound, but that is my current thinking. If SSS reverses again I'll rethink the position.
