There is not any denying that Dollar General (NYSE: DG) shareholders were sucker-punched last week. In response to the discount retailer’s second-quarter earnings miss and lowered revenue guidance for the rest of the 12 months, shares fell 32% on Aug. 29, the stock’s worst day ever.
Most investors are actually greater than just a little leery of owning a stake within the discount store chain. But for those who imagine it’s darkest before dawn, with the stock now down 68% from its 2022 peak and trading at a seven-year low, this might actually be a primary time to purchase shares on this savvily positioned company.
“Financially strapped”
Dollar General dished out some serious disappointment with its second-quarter numbers. Although overall sales grew 4.2% 12 months over 12 months to $10.21 billion, growth in same-store sales (comps) was an anemic 0.5%. Operating profits actually fell 20%, dragging per-share profits down from $2.13 a 12 months earlier to $1.70 this time around. Analysts were on the lookout for earnings of $1.79 per share on a top line of $10.37 billion.
Fanning the bearish flames was lowered sales guidance for all of 2024. The retailer had been modeling revenue growth of between 6% and 6.7%, fueled by more cost-conscious consumer spending. Now it’s only on the lookout for revenue growth between 4.7% and 5.3%, with comps growth dialed back to an expected range of only one% to 1.6%.
Perhaps the brunt of the post-earnings plunge, nevertheless, was driven by the undeniable fact that these numbers contrasted so starkly with those from similar Walmart. It produced top-line growth of 4.8%, fueled by same-store sales growth of 4.2% inside the U.S. The retailer also raised its full-year revenue and earnings guidance.
What gives? The secret is the difference between the 2 corporations’ typical customer. As CEO Todd Vasos commented through the second-quarter earnings conference call, the “lower-end consumer continues to be very much financially strapped, especially because it pertains to her ability to feed her families and support her families.”
With Dollar General’s core value-minded customers unable to proceed spending as they’ve up to now, the retailer is basically on the defensive until things recover. That would take some time, though, and matters could remain miserable for the corporate within the meantime. Given this, it isn’t surprising investors panicked.
Just remember one necessary idea about how the economy and the stock market work.
Dollar General’s worst-case scenario is its current reality
Dollar General doesn’t really go head-to-head with greater players like Walmart or Goal. If anything, it mostly avoids competing directly with either chain. Whereas Goal and Walmart stores are typically present in heavily populated areas, 80% of Dollar General’s stores are in often-underserved small towns with populations of lower than 20,000.
It also caters to the households with lower incomes more more likely to be seen in such locales, in response to data from market researcher Numerator. Products with customized product sizing allow for lower prices, for instance. Much of its inventory can be private-label stuff, giving the retailer much more control over the way it meets the needs of its most frequent shoppers.
And the strategy normally works great. The discount retailer saw incredible revenue and footprint growth between the top of 2008’s subprime mortgage crisis and the start of the pandemic.
The circumstances since 2021, nevertheless, have been extraordinary. Namely, inflation has been rampant. The U.S. Consumer Price Index is now 21% higher than 4 years ago, and that number arguably understates the actual effective increase in the fee of living. Income growth just hasn’t kept up. That is why for the higher a part of the past three years Walmart has been touting that almost all of its gains in market share have come from households earning in excess of $100,000 per 12 months — this crowd’s seeking to stretch their dollars too. McDonald’s recently reported disappointing quarterly results largely as well because, in response to CEO Chris Kempczinski, customers “proceed to feel the pinch of the economy and a better cost of living.” And that echoes recent observations from executives with PepsiCo and other consumer-facing corporations.
It is a problematic dynamic for Dollar General just because its core customers — lower-income rural households hit hardest by inflation — aren’t changing how they’re shopping or what they’re buying. These consumers are simply spending less. Underscoring this concept is comparable results from direct competitor Dollar Tree. Its Dollar Tree brand saw modest same-store sales growth of 1.3% last quarter, while its Family Dollar banner actually suffered a same-store sales decline of 0.1%.
In light of all of this, it isn’t surprising that investors are fearful concerning the retailer’s foreseeable future. But there’s something the market appears to be forgetting here.
The chance is well worth the reward for strong-stomached investors
That’s, the economy is reliably cyclical, but ultimately growing. The past couple of years have been the intense exception to this norm, creating the affordability crunch that is crimping consumer spending now.
There’s never been any doubt about Dollar General’s business strategy, nevertheless. The economy that typically works in Dollar General’s favor will accomplish that again in the end, and sure sooner than later.
And waiting for clear evidence of that rebound to dive into Dollar General stock may very well be a strategic mistake. Stocks have a funny way of trading predictively, reflecting probable results anywhere from a number of months to some of years into the long run.
So while it’s struggling right away, Dollar General is more likely to be faring higher soon. Its stock should start pricing in such a turnaround even sooner. Indeed, now down 68% and trading at a seven-year low, the worst-case scenario may already be priced into the stock, after which some.
Taking a swing right away is not for the faint of heart. The likely volatility could prove unsettling even when its net effect is bullish. Keep it in perspective for those who’re inclined to dive in.
In case your gut is telling you to dive in, though, do not be afraid. As Warren Buffett likes to say, be fearful when others are greedy and greedy when others are fearful. And the market is clearly quite petrified of Dollar General right away.
Must you invest $1,000 in Dollar General right away?
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James Brumley has no position in any of the stocks mentioned. The Motley Idiot has positions in and recommends Goal and Walmart. The Motley Idiot has a disclosure policy.
1 Growth Stock Down 68% to Buy Right Now was originally published by The Motley Idiot