No. of Recommendations: 14
It has a lot of reasonable observations, but some of its core assumptions seem off to me.
The core of the author's thesis is that DGs maximum store count is 25k (a figure mentioned by then CEO Dreiling in 2014). The author does not address the fact that DG's competitor, DLTR, shares DG's outlook on the growth outlook for dollar stores in the US, and is, indeed, even more aggressive than DG on this point. In any case, DG stated in 2022 that it expects its US market to top out at around 28-29k DG stores, and 3k pOpshelf stores, for a total of 31-32k stores. Specifically, in the 2022 3Q, Owens stated: "he U.S. alone, we have 16,000 additional opportunities, and we feel great about our ability to capture those. And certainly, our fair share, which we've certainly demonstrated, but 12,000 additional for DG, 3,000 for pOpshelf and then 1,000 for DGX." If the author mentioned this updated projection, or DLTR's similar projections, I didn't see it.
The author's pessimism is grounded on the claim that DG requires about 6, 000 residents per DG store ("As mentioned above, an average DG store needs 2.5k households that frequently shop in DG to support its store economics, which is roughly 6k population"). Without getting into the nuts and bolts of how the author gets there, one simple way to test this thesis is to ask how it matches with DGs operations on the ground.
Let's look at the four DG-densest states: Mississippi, West Virginia, Alabama, and Arkansas. In these states, DG has 3.03, 2.67, 2.47, and 2.47 stores for every 10 000 residents:
https://www.wwno.org/news/2023-04-06/dollar-stores.... In other words, 3333 residents per store, 3745, and 4048, respective. That's a pretty large sample of population where the author's thesis is vastly underestimating DG's capacity to run its stores in population-light contexts.
What do things look like elsewhere? In the "West", DG has about 0.36 stores per 10, 000 residents. That's a DG store for every 27, 777 residents. While I think DG's potential in the Western states is lower than in the South, for a few reasons (population density, minimum wage laws, etc.), I'd wager that there's still quite a bit of room for growth. To take one example, DG just opened its first store in Montana this month.
For this and other reasons, and even accepting the author's implied assumptions that pOpshelf is shuttered (DG expects 3,000 stores, and has built about 90 this year, but receives no mention in the artile), and Mexico expansion turns to nothing (again, no mention), I very much doubt the author's claim that DG's expected store count FY2030 will be about 24, 000, and that this will be close to be bumping up against DG's maximum potential store count -- unless the DG model is broken, and there are bigger issues at play.
Another overly bearish assumption in the analysis is with respect to operating margins. The author claims that DGs operating margins have "been around 7-9% since 2011, except for some one-off macro events (e.g. 2021 gov stimulus check), or when fundamentally retooling its business model (e.g. 2008-10 during Dreiling's leadership)." I have no idea where this 7-9% figure is drawn from, and it seems off by a full percentage point to me. Note: In the years for which the author provides operating margins (2008-2010), his figures match my own.
Here are my operating margin figures for 2009 - 2022:
2009 8.1%
2010 9.8%
2011 10.1%
2012 10.3%
2013 10.0%
2014 9.4%
2015 9.5%
2016 9.4%
2017 8.6%
2018 8.3%
2019 8.4%
2020 10.5%
2021 9.4%
2022 8.8%
You'll notice that operating margins don't dip below 8% (they did so in 2008, and will almost certainly do so in 2023). Indeed, the mean is 9.3%, i.e., above the author's alleged maximum range for the time period.
This claim regarding margins is relevant for the author's model. The author starts FY2024 at 7.8% operating margins, and drops them to 6.6% by FY2030. The author states: "I model its profit margin to slowly decline by 120bps in 7 years to 6.6% by 2030, and the stock P/E is valued at 12x then." In other words, the author takes 7.8% to be DGs normalized operating margins, and then drops the figure from there.
Maybe that's right, or reasonable, but the above fudging of DG's traditional margins obscures the fact that 7.8% is a significant step down from DG's average operating margins, as well as a step down from DG's lower op margins in 2017-2019, i.e., DGs lowest 3-year period with respect to operating margins.
