Sunday Finds + Initial Thoughts on Dollar General
Links to podcasts from last week!
Welcome to Chit Chat Money’s Sunday Finds + One Thought From Last Week newsletter. In this newsletter you will find a topic I wanted to write about from last week, links to shows we’ve recently released, and links to some interesting articles, podcasts, and tweets. Check out the archive here.
Chit Chat Money Podcasts From Last Week
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Initial Thoughts on Dollar General
I’m changing up this section from “3 thoughts” to just one. I typically struggle to find three things interesting enough to write about in a week, or ones where I think I have an interesting opinion. So, I am changing this section to be focused on one topic with some (hopefully) more fleshed-out ideas. Still, you shouldn’t take these write-ups as more than some half-baked journal entries.
This week, I want to talk about Dollar General. We did our initial research on the company and recorded a podcast on the stock that will come out on Tuesday (listen on Apple, Spotify, YouTube, etc.).
The company is at a bit of a crossroads, and it is unclear what exactly is going wrong. Comp sales are much weaker when compared to its closest competitors, margins are weakening fast, and the new management team seems to be all over the place. Unlike most episodes, I came away even more confused about DG’s future than before our recording.
On the one hand, the stock looks mighty cheap if you believe profit margins stay anywhere near today’s levels. The trailing EV/OI would be under 10 if margins can stay at 8% assuming no new store growth and flat comp sales. I think store count and comp sales growth can both be in the 2% - 4% range this decade, depending on inflation. Returns are likely solid going forward, especially once you consider how accretive share repurchases can be at current prices.
On the other hand, margins could easily slide down to the 5% - 6% range if the company is forced to invest more in labor and lower its prices due to competitive threats. It is also likely management is burning capital by investing in pOpshelf, DG Media, and these new fresh initiatives (who is getting their produce from DG? dumb). Returns going forward are likely poor under this scenario.
Obviously, these developments have me concerned as a potential investor. Looking at the stock chart a lot of other people are concerned too. The question — as always — is whether these concerns are overblown.
Here are some questions I still need to answer before investing in DG:
What will steady state margins be? Or, what sort of operating margins can they attain while also achieving industry-level comp sales growth?
Was the comp sales slowdown in recent quarters an anomaly?
Will comp sales outperform in a recession as they did in the GFC?
Have they run out of most good store locations in the United States?
Can Mexico provide another large reinvestment runway?
How much capital are they destroying with pOpshelf?
With a terrible incentive structure and vague MBA commentary, can I trust the new management team?
A lot of investors I trust/admire like DG. Some have added to their positions during this drawdown. For me, I think the dealbreaker is going to be this new management team. I simply don’t trust them or this proxy statement. Even if forward returns look appealing from today’s price, I think it is vital to be disciplined when finding the managers you want to partner with.
One random question I keep asking myself: Why would I buy DG over American Express when they trade at similar forward P/E’s? Amex has a wider moat, better management, and better growth prospects. Don’t think I would want to own DG unless its normalized earnings ratio hits well under 10.
See you next week,
Brett
***Our fund, Arch Capital, may own securities discussed in this newsletter. Check our holdings page and read our full disclosure to learn more.***
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3 Intriguing Reads
Weekend Thoughts - Discipline Funds
I’m a little disheartened by the Lewis commentary because he’s trying to diminish the severity of what happened here by claiming that SBF ran a good business on one side and got into hot water in an unrelated hedge fund. Okay, but this is precisely what Madoff did. Madoff Securities was one of the largest and most innovative market makers on Wall Street for many decades. They ran a large and legitimately great business. They were also commingling client funds and running the fraud in accounts on the side. This is almost exactly what SBF was allegedly doing.
Journalism schools will be able to use “Going Infinite: The Rise and Fall of a New Tycoon,” Michael Lewis’ new book about the collapse of the FTX cryptocurrency exchange and the fall of its boss, Sam Bankman-Fried, as a textbook on the imperative need to approach a subject with a healthy helping of skepticism.
To make a long story short, in this book Lewis doesn’t exercise any.
1 Good Podcast
Smart, Funny, and Insightful Tweets:
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