Dollar General (NYSE: DG) was a shining star in the dark sky of the pandemic’s early days. Positioned as a haven for essentials like paper towels at affordable prices, the store chain attracted throngs of shoppers. However, the recent trajectory of the company has taken a nosedive, with shares plummeting by 39% since the dawn of 2023, while the broad-based S&P 500 index surged by a robust 37% during the same period.
Despite the seemingly enticing dip in stock price, a deeper dive reveals fundamental weaknesses that should give potential investors pause. Here are three compelling reasons to steer clear of Dollar General stock.
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Challenges in Sales
Consumers grappling with rising prices should ideally find solace in Dollar General’s promise of affordability, given its vast array of products priced at $10 or less. Alas, this has not been the case. The crucial retail metric of same-store sales (comps) for Dollar General’s fiscal fourth quarter inched up by a mere 0.7%. More foot traffic failed to translate into higher spending, a worrying trend that has persisted. While increased store visits are positive, they ring hollow if customers aren’t opening their wallets.
A myriad of value-focused options, ranging from industry giants like Amazon and Walmart, have further diluted Dollar General’s competitive edge. These retail behemoths leverage their size to drive down prices, further complicating Dollar General’s path to success amidst stiff competition.
Margin Squeeze
Dollar General’s strategic emphasis on consumables, such as paper towels and toilet paper, while intended to draw customers into stores, has inadvertently led to a margin crunch. The sales composition has shifted significantly towards lower-margin items, with these products accounting for a higher proportion of overall sales. Compounding the issue, Dollar General’s gross margin has been under pressure due to factors like increased shrinkage and the need for inventory markdowns.
Mounting expenses from labor, occupancy, and surging credit card fees have further eroded profitability, as the company struggles to pass these costs on to customers. In the last reported quarter, Dollar General’s diluted earnings per share (EPS) plummeted by over 38% to $1.83.
Management foresees scant improvement on the profitability front this year, with a projected diluted EPS range of $6.80 to $7.55, signaling a flat to a 10% decline from the previous year. These projections hinge on modest comp growth in the range of 2% to 2.7%.
Investor Concerns
Flashing warning signs for investors, Dollar General has ramped up its capital expenditures for store expansions and refurbishments. While this could yield benefits in the long run, the lackluster sales performance casts a shadow of doubt on the potential returns from these investments.
Amid these challenges, Dollar General curtailed its share buyback program after a hefty $2.7 billion splurge in the prior year. The company remains committed to opening 800 new stores, executing 1,500 remodels, and relocating 85 outlets this year. Given the lackluster comp figures, a cautious stance on the stock appears prudent until the efficacy of these initiatives becomes clear.
Although the stock market initially viewed Dollar General’s recent results, particularly the rise in store traffic, favorably, the overreliance on low-priced, low-margin products spells trouble for sustained success. It behooves investors to divest from Dollar General shares and explore opportunities in retailers with brighter prospects.
At this juncture, investment in Dollar General should be approached with trepidation as uncertainties loom large over the company’s growth prospects.
*Stock Advisor returns as of March 25, 2024