No. of Recommendations: 18
I'll be the first to start on this board as DG looks like it's going to be a long(er) term hold to at least get my money back. :) The new options will come out in a couple weeks. That will let me roll my current ones out a year and take the loss this year. One of the very few benefits of paying a 53.5% marginal tax rate while living in California.
It sure reduces the pain of the losses and should at a low cost buy another year of recovery time.
I'm sure open to any other ideas other than doubling down. I've already done that maybe more than once. :)
No. of Recommendations: 13
I'm also thinking through next steps after 2Q. Unfortunately, I think some of the news in the quarterly report goes to the quality of the enterprise going forward.
Some of my own notes on the 10Q & Earnings Call:
(1) The most concerning item to my eye is that DG's same store sales is stalling (projected -1% to +1%) while its peers are enjoying continued same store growth. It is unclear to me whether the investments now being made to address the inventory and related issues (stores in disarray) are short term costs or the new cost of doing business, i.e., are we looking at a long term drop in profit margins or is this a blip related to certain cyclical and other concerns? My understanding is that DG has a different consumer profile compared to most of its competitors (on the lower end of the income spectrum, with only Family Dollar catering to lower incomes), and with a larger modal store model compared to its peers, to perhaps a 'dollar-to-dollar' comp isn't entirely appropriate, but there is certainly a concern here.
(2) The almost doubling of debt service year over year is having a real impact on profitability. I don't necessarily disagree with the decision to stop buybacks to pay down debt, as the right decision for today, but the decision -- as well as the decision to keep the dividend throughout -- strikes me as a poor allocation of resources, when considered from the long term vantage point. The debt issue could have been headed off in sunnier times. The larger issue I'm having is what to make, if anything, of the change of management. Owen started as CEO in Nov 22, after his stint as COO since 2019. While I think there's something to be said for the fact that we're in very uncertain times, substantial reductions in guidance in two consecutive quarters isn't comforting.
(3) Some of the hit to earnings appears to be the combination of consumers switching to low margin consumables, at the same time that DG is needing to pay higher labour & real estate costs. On the latter point, there was a significant rise in selling, general and administrative expenses, with the company pinning the 1.36% increase on increased costs of "retail labor, utilities, depreciation and amortization, and rent". Much of this strikes me as either cyclical or as issues that DG is addressing via modernization efforts.
(4) DG is still emphasizing the larger store formats (80% of new stores, and all relocations), and is reporting that the larger stores are still "providing better increased sales productivity per square foot as compared to our traditional stores". It's still also expanding aggressively, despite the increase in debt service costs: the forecast for fiscal 2023 is for "3,110 real estate projects in the United States, including 990 new store openings, 2,000 remodels, and 120 store relocations." New store growth is at about 5%.
The optimist in me says that DG has had a very long run of excellent performance, and that the short term stall and then reduction in profits will be but a blip in a few years. If they do get back on track, there's a great base for earnings well in excess of $8 a share.
The pessimist in me is taken by the debt load, the struggles on the labour front, the chain's apparent inability to keep pace with its rivals (e.g., it appears some of the loss of sales was due to Family Dollar undercutting DG on price), and the frustrating lack of clarity on DG's prospects in its Q1 report (only the second under Owen, I believe).
Taken together, a very disappointing quarter. I'm now a little more boom and bust in my opinions about the stock.
Also curious how others are feeling. I am, unfortunately, holding some 2025 call options, and similarly thinking I'll probably roll out at some point, likely with a reduction in exposure more generally.
No. of Recommendations: 11
Good comments, thank you.
1)It's a simple business to understand that is making money/cash. Almost 20,000 of the same thing.
2)Seems it would/is hard hide much on their balance sheet compared to a lot of companies.
3)Wouldn't surprise me if someone (PE) would make a run at them if the price stayed where it is. The price is 50% off 10 months ago price. PE might stop the Mexico expansion or sell it off, cut new store openings, pile on more debt for a larger return on equity, and cut expenses to the bone to the extent they do take some bone. Bring it back public in a few years making billions.
4) Comps next year should be good.
5) Buying a company making decent money and selling for 50% of sales revenue isn't too bad a bet, normally.
6) Buying 2,000 tractors and maybe 5,000 trailers to run your own distribution efficiently probably takes 2-3 years at the best.
7) They are not saying 20% of their stores are losing money and need to be shut down.
8) An off balance sheet asset is their long term leases with multiple 5 year options. Say one new lease being offered at 6.75% Cap rate. Initial lease was for 15 years with 5-5 year options with 10% increase every 5 years. That's probably a 1.8% annualized inflation increase for 40 years. My point is that some of the older leases probably have some equity value.
Yes, optimist outlook as long as you have the patience to wait AND don't think the basic units (store) model is broken.
You're only as good as your dumbest competitor, which I don't see that in this industry. You need scale and they have it to compete.
Probably should do a Buffett trick and buy Dollar Tree/Family Dollar also. Then you own the industry.
Just thoughts!! --- though rose colored glasses.
