Dollar General Corporation (NYSE:DG) is a leading discount retailer primarily serving lower-income households. The company’s target household segment has an annual income of about $35K. The company’s retail footprint is mainly in rural areas, serving communities that “prefer shopping within a 3- to 5-mile radius of its stores.” According to Dollar General’s former CEO Jeff Owen, the “proximity allows them to shop with familiar faces and be served by people they know, enhancing the shopping experience.”
Despite that, DG’s plunge from its early 2022 highs has likely stunned its holders. Accordingly, the company collapsed more than 60% from those levels through its recent October 2023 lows in price-performance terms. On a 1Y total return basis, DG posted a return of -52.3%, as Dollar General’s collapse coincided with Owen’s rein as he assumed the company’s top executive post in November 2022.
As such, the departure of Owen in favor of its previous CEO, Todd Vasos, wasn’t surprising. Vasos was DG’s CEO from June 2015 to November 2022 and has continued to serve on the company’s board. As such, the leadership transition is expected to be a relatively smooth one, with a familiar face with deep insights about the company’s strategies and operations taking over the hot seat. Dollar General’s management was clear about why they decided to appoint Vasos. Chairman Michael Calbert explained that the board “determined a change in leadership is necessary to restore stability and confidence in the company’s future.”
Interestingly, DG has staged a remarkable rebound since it bottomed out at its October 2023 lows ($101 level). Accordingly, it closed by almost 18% above those lows last week. As such, the critical question facing investors is whether we have seen the worst of DG’s waterfall decline, as it remains close to the lows seen in mid-2019.
Investors must ask whether the main problems facing the company are within or outside of its control. For instance, macroeconomic uncertainties, high inflation, and elevated interest rates are likely headwinds outside Dollar General’s control. In contrast, inventory levels, product mix, and competitive challenges could be mitigated and improved with better strategies and robust execution. Vasos has proved his ability to lead DG well over the seven years under his watch. As such, the favorable response over the past three weeks corroborated improved buying sentiment toward Dollar General’s potentially better execution.
Analysts’ estimates suggest Dollar General’s topline growth could bottom out in FY23 (year ending January 2024) at 2.3% before reaccelerating to 5.1% in FY24. In addition, its adjusted EPS decline of 30% is also expected to reach its bottom this FY before inflecting back into growth, reaching 7.1% in FY24. Despite that, Dollar General’s adjusted EPS is not expected to recover to the FY21 levels through the FY26 forecast period, suggesting structural challenges.
As such, investors who decide to buy DG’s dips and try catching the falling knife must bake in assumptions that DG might not recover its 2022 highs in the near- or medium-term. In other words, unless the external environment improves further, Dollar General could undergo a structurally slower and more expensive growth phase that is unlike Vasos’s previous leadership between 2015-22.
DG last traded at a forward EBITDA multiple of 13.8x, just above its 10Y average of 12.8x. As such, DG’s significant decline could be ascribed as a growth normalization phase resulting in a collapse from its overvalued zones. While it boasts a favorable “B” profitability grade by Seeking Alpha’s Quant, its “D” momentum grade and “D-” earnings revisions grades indicate the market’s pessimism over its execution.
Despite that, I assessed that DG could still bottom out at the current levels if dip buyers could hold its October lows well and not allow another decisive breakdown. The recall of Vasos suggests Dollar General’s board recognized a strategic change is necessary to realign their confidence with investors again.
As of now, buyers are giving management the benefit of the doubt. However, they need to deliver and demonstrate that Dollar General’s worst is likely over.
Rating: Initiate Buy.
Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Please always apply independent thinking and note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified.
We Want To Hear From You
Have constructive commentary to improve our thesis? Spotted a critical gap in our view? Saw something important that we didn’t? Agree or disagree? Comment below with the aim of helping everyone in the community to learn better!
Read the full article here
