DG
🛡️ Dollar General benefits from low exposure to tariffs (only 4% imports vs. 40% for Dollar Tree) as it primarily sells locally sourced goods like food and beverages.
📈 The company shows signs of recovery after facing challenges like wage hikes and inventory issues, with Q4 sales and comparable store sales increasing, and inventory levels reducing.
🏪 Continued expansion (700 new stores, 1600 remodels) and a valuation below historical averages (15x P/E vs. 18x) suggest management confidence and potential upside.
@Artedeinvertir:
“Second business and very interesting, this is Dollar General. Eh, it’s quite a case, the case of Dollar General is quite curious. For those who don’t know, they are like convenience stores where fast-moving consumer goods are sold. Well, here you have a photo of the store, they sell detergents as well as plates for parties, toys for children, it seems there’s toilet paper here, drinks, food. And this is the typical store format. It’s a typical American store format with parking in the front, and they are rather small format stores, but strategically placed, what would be called convenience stores. So, the internet normally doesn’t compete against this type of thing because they are things that people buy when they are on their way to work or on the way back or on impulse because they need it. So, sending this over the internet is not economically viable because they are very low-value items. And this is a business that has given excellent returns in the stock market, but not only this company, but all of them. One of the best is one from Canada called Dollarama. Eh, it’s very well managed, there’s a family, and in this current crisis of inflation and consumption, it has done very well. Eh, Dollar Tree also, the ticker is DLTR, Dollar General, all have done very well in the stock market. So, you know that a very easy and basic piece of advice for all of you investing in the stock market is that if all the companies in a sector have done well, then we are obviously facing a good sector, and it’s easier to select good investments, and it’s harder for us to make mistakes or choose the one that will go wrong if there is a tailwind because the structure of the sector pushes forward. The same happens, for example, with social media companies, everything that is, well, Google with YouTube or Facebook, or in other sectors, for example, tobacco companies, for example, the same thing happens. Almost all historically have performed quite well. Eh, companies, for example, from the airline sector, all except the airlines themselves, which due to the structure of the sector perform a bit worse. So, if you look at the Dollar General chart, it had dropped a lot due to a series of problems. First, there was a very significant wage increase due to inflation, and since the workers they have earn minimum wage, they automatically had to raise their salaries, and that affected margins. These companies accumulated a lot of inventory post-COVID during the time there were supply chain problems, thinking that prices wouldn’t stop rising, and what they found was a huge inventory, and inflation moderated, and that affected their margins. The customers of this type of business are middle class or lower-middle class, which is what has been most affected by the rate hikes, which is what Trump explains about the tariffs, that he wants to see if with the tariff war he manages to lower interest rates, well, they have little disposable income and have consumed a little less. The public image because of how they treated employees somewhat, these scandals they had, but well, this point seems a bit weaker to me. Dollar General is in the portfolio of six of the best investors currently. Some of them have even recently been increasing positions. And it’s very curious, if you look here on the right at the graph, since the tariff war began in February, which is marked here, the stock was trading between $70 and $75, and look how curious, it has gone to $89, meaning it has risen. People have gone to take refuge in this company because we are going to see now that it is very protected against the issue of tariffs. On one hand, point number one, and point number two, the problems they had in the past have already started to be corrected. In fact, in this Morningstar article we talked about earlier, one of the analysts commenting on the company, this is translated into Spanish, eh, you can see that he said Dollar General or Dollar Tree are not the same. The analyst says, ‘They might seem like very similar companies, but Dollar Tree imports 40% of its merchandise or inventories from China or other cheap countries, while Dollar General only imports 4%. Because instead of selling the typical cheap things made in China, it sells a lot of food and beverages in its stores, which are normally from local US producers. Therefore, if tariffs increase, it won’t suffer and won’t have to raise prices for its consumers. And that is a quite important difference for Dollar General, which by the way had dropped a lot, as we mentioned before, due to those problems we commented on, it dropped from $250 to $70, but well, here although it’s not visible, it looks small, well, it has started to rebound a bit. In fact, the company’s latest results, if we look at this in green here, fourth-quarter sales finally increased, which hadn’t risen for a long time. And what are called comparable sales, which take into account the number of stores opened and closed, because the company continues to open stores, so it can’t be that bad if management sees expansion opportunities, well, it means it’s still working. If they had a more serious problem, well, they wouldn’t be opening stores. Comparable sales, what each store sells, increased by 1.2 or 1.4 adjusted for the full year, which indicates that they are finally turning the business around. And the inventories they have accumulated, they have managed to reduce that inventory problem they had. They have gone from 7 billion to 6.7, and above all, here we see something very important, which is that the company during the last year has opened 700 new stores and remodeled another 1600, which is significant that it continues to open, they are, I repeat, very small stores, I mean, the company has tens of thousands of stores, but it continues to open a very significant number because there continues to be high demand from customers. So, the company has these objectives. Grow sales and comparable sales by 3 or 4%, it’s a mature business, as we talked about before, the typical, well, things people consume in their daily lives and essentials for humans, and they expect earnings per share to grow at a rate higher than 10%, and they have this goal starting in 2026. Some of these objectives, even the goal of returning to solid growth and leaving problems behind in 2025, is their objective. They even plan to open 2% more new stores every year, and that will continue this year, so it seems the worst is over, and the company projects a new era for the company. Thanks to this, well, the company normally traded at 18 times earnings. Now it’s cheaper, now it’s at 15 times earnings, and until recently when people rushed to take refuge in these companies, well, it was even cheaper, it was at historic lows, just like Campbell Soup we saw earlier, which was also curiously, like this company, at 12 times earnings. These quality consumer companies are difficult to find normally below that valuation, even in the 2008 crisis.”
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