David Burrows Dollar General Corp. DG-N DON'T BUY Sep 04, 2024

Valuation's today are quite attractive, may be low enough to take a bite. Not worried about US economy, it's in decent shape, and that includes all levels of income.

DG dropped significantly after the earnings release and is now trading at 11.8x Forward P/E, a record low compared to historical averages. The reason for the sharp drawdown was mainly due to weak operating results and a downward revision in guidance. In the 2Q, DG’s revenue grew 4% to $10.2B, missing estimates of $10.37B and EPS of $1.7 also missed estimates of $1.79. DG revised guidance in same-store sales down, which is expected to be between 1%-1.6%, a reduction from 2%-2.7% that DG previously forecasted. The company mentioned the weak results were largely due to financially constrained customers, however, both WMT and TGT reported solid numbers a few weeks ago. The balance sheet is leveraged with a net debt/EBITDA of 3.0x, which DG is paying down gradually. DG brought back the old CEO with the hopes that he could turn around the company’s operations, which have decelerated meaningfully in recent years. Overall, a very weak earnings result - we think investors are better off looking somewhere else until DG demonstrates a path to recovery.
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It is a play on the lower economic portion of the economy and will continue to see a substantial portion of the economy. He doesn't like the demographics and doesn't buy retail.

If Trump slaps tariffs on Chinese goods, the dollar stores will suffer badly.

Questions about health of lower-income consumer. Both companies have flagged this on conference calls. DLTR is taking steps to increase price points, and an improving consumer would be a tailwind. If he had to choose, DLTR would be his pick.

Reflects the bifurcated consumer market in the US. Higher-end names that cater to higher-end income levels are doing well. But DG is only in the income segment that's been impacted the most by higher prices.

It yields 3%, but Walmart is crushing it.

He sold it in April and now owns Costco in this space. It is trying to turn things around and get efficiencies up. It plunged after an announcement in late August.

It reports Thursday. This and Dollar Tree have been eclipsed by Walmart, who is not at the mercy of the big suppliers.