In March 2023, the Dollar General investment thesis appeared intact. The company had reported +4% comps over the prior year (fiscal 2022), with 2023 guidance calling for a similar outcome (roughly in-line with reasonable normalized expectation for the retailer). In addition, with help from ongoing new unit growth and repurchases, the company was expecting EPS growth of roughly 10% against the $10.7 per share that it earned in 2022 (adjusted for the 53rd week). At ~$210 per share, DG traded at ~20x 2023e earnings.
This is a very minor thing but it'd be helpful if graphs that cross from positive to negative values could have the "0" guide specially marked in some way. The YoY category sales and Quarterly SSS graphs in this post were a little tricky to read; category sales in particular where "seasonal" and "home" spent time bouncing across the border, which made it hard for me to get an immediate visual intuition about while reading the rest of the article.
Alex - Really appreciate the honest assessment. Curious to get your view. Does this steep drop in margins break the investment thesis? I doubt anyone had EBIT margins dropping from > 9% to < 7% even in the downside case scenarios. I assume most folks had DG as a source of stable earnings through economic cycles. Does it raise any concerns that the business might not be as strong as you initially believed?
To me, it feels like DG is more of a “B” business (names like MSFT, SPGI and V would be examples of “A” businesses). Maybe I am 100% wrong, and this poor margin performance is just the perfect storm combined with management execution errors. But I just am not nearly as confident as I used to be that I could forecast DG earnings. And with all of the operating leverage, even small changes to margins really move the needle.
Hi Alex, good note thanks. What do you think about leverage - any chance DG has to lower store growth to get leverage back under their target? Also do you think there is any correlation between the needed labor investment and the company's push into fresh products and now produce?
This is a very minor thing but it'd be helpful if graphs that cross from positive to negative values could have the "0" guide specially marked in some way. The YoY category sales and Quarterly SSS graphs in this post were a little tricky to read; category sales in particular where "seasonal" and "home" spent time bouncing across the border, which made it hard for me to get an immediate visual intuition about while reading the rest of the article.
Alex - Really appreciate the honest assessment. Curious to get your view. Does this steep drop in margins break the investment thesis? I doubt anyone had EBIT margins dropping from > 9% to < 7% even in the downside case scenarios. I assume most folks had DG as a source of stable earnings through economic cycles. Does it raise any concerns that the business might not be as strong as you initially believed?
To me, it feels like DG is more of a “B” business (names like MSFT, SPGI and V would be examples of “A” businesses). Maybe I am 100% wrong, and this poor margin performance is just the perfect storm combined with management execution errors. But I just am not nearly as confident as I used to be that I could forecast DG earnings. And with all of the operating leverage, even small changes to margins really move the needle.
Hi Alex, good note thanks. What do you think about leverage - any chance DG has to lower store growth to get leverage back under their target? Also do you think there is any correlation between the needed labor investment and the company's push into fresh products and now produce?