Retail – Fountainheadinvesting

Dollar General (DG) (Retail) $87 – Down 30% on weaker than expected numbers, avoid till we see some improvement.

Dollar General’s growth has been tepid at 4%, which is not surprising given its customer base that is highly exposed to inflation – their core customers are financially constrained. But what is even more worrying is that comparables or same store sales growth (best measure for retail/restaurant chains) was a even lower 0.5%. Perhaps the brains trust should not have been expanding stores in a difficult environment. That has hit profitability – down 20% as well.

Rising competition from Walmart, Aldi, and ultra-low-cost brands like Temu further challenges DG’s business model, especially in non-food categories.
Sentiment indicators suggest that sentiment for the poorest third of Americans is at levels we saw during the bottom of the Great Financial Crisis – not a good place to be.
Is the 30% drop enough? Guidance doesn’t seem to suggest so – The company sees net sales growth between 4.7%-5.3%, down from previous expectations of 6.0%-6.7% growth. Same-store sales are expected to grow by no more than 1.6% – adjusted 1.1% lower. .
The other problem with DG is that even on a historical 10 year the stock has returned only 38%, so you have to be really careful about buying it at the right price. I would wait to see some improvement.

BJ’s had been a decent performer, starting from the $40’s range in 2020, to $65. (A lot of it Covid outperformance)

That’s about 16% per year. Though in the past year, BJ’s has had a negative return of 10%.

Currently it’s priced at 15x earnings with forward estimates of 5-6% in earnings and 4-6% in revenues, so that’s a Price to Earnings Ratio (P/E) of 15, with growth of 5, that’s a PEG ratio (P/E to Growth) of 3, which is high. I normally try not to pay more than 2, unless there is really superior growth. Not likely in this sector.

Contrast that with closest competitor Costco, which has earnings growth of 10 to 11% but at a P/E of 35 and – that’s even more expensive!

That said, Costco is a far superior business, with more stable margins, operating efficiencies and scale, which attracts both high volume sellers and customers. Costco is about 10X BJ’s and both started out around the same time. BJ’s unlikely to take market share from Costco,

Bottom line – If the stock becomes a bargain around $55 I could see it returning around 7-8% a year. On the other hand a company like this doesn’t fall as much in bad times, it’s a low risk stock.