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.
