The Dollar Store Downturn

From “Dollar General: From Bad To Worse” (September 2023):

“As I see it, the bear case for Dollar General is best explained by examining Walmart’s results since Doug McMillon became CEO [in 2014]. Over the past decade, the company has invested to sharpen its price points, to improve the cleanliness and efficiency of its U.S. stores, and to build out e-commerce (omnichannel) solutions like pick-up / delivery that can more effectively compete with DG’s value proposition (said differently, better positioned to compete for certain purchase decisions that they may have been losing to DG previously). While I think these investments were clearly the right ones for Walmart over the long-term, their sustained impact is still evident in today’s P&L: Walmart U.S. FY23 EBIT margins are still well below FY13 levels. I think a discouraging outcome for Dollar General investors could take a similar shape: an extended period of margin compression from a combination of price investments and rising costs… If this materializes, I think it is not insignificant to consider what that would ultimately mean for Family Dollar.”

As I wrote in June, Q1 FY24 seemed like a notable step in the right direction for Dollar General; not only did they close the comp gap with Walmart U.S., but they also took another step ahead of Family Dollar. That was only the first move towards an improvement in their financials, with plenty of work left to do on profitability / margins, but it was an important step nonetheless (especially so given Dollar Tree’s announcement on impending Family Dollar changes).

Then DG’s Q2 FY24 results took all of the air out of that balloon.