5. Dollar General Corporation (NYSE:DG)
Number of Hedge Fund Holders: 42
Dollar General Corp (NYSE:DG) is an American retailer that runs a chain of discount stores across the US and Mexico. It offers a wide and discounted selection of merchandise, including consumable products like food, beauty, health, pet supplies, and cleaning products, as well as non-consumable items such as seasonable merchandise. It operates around 2,000 stores, and announced plans to open more than 800 stores across the US at the opening of its 20,000th store. The company also announced plans to remodel around 1,500 locations and relocate 85 stores in 2024.
Dollar General (NYSE:DG) is among the several retailers that have suffered under deteriorating economic conditions. Its Q2 2024 results fell short of expectations, primarily because its majority customer base of lower-income families suffered due to inflation. However, with inflation bubbling down, the company is expected to make a comeback. It is moving to compensate for losses and improve its profit margins by improving its stores and inventory handling. Enhancing the appeal of its stores is one of the company’s efforts to increase customer engagement.
In addition, Dollar General Corp (NYSE:DG) is one of the companies in a good position to benefit from the cuts in interest rates by the US Federal Reserve in September. The cuts are anticipated to increase liquidity in the market, which can drive sales by benefiting customers. The company is also working to ensure an accurate and timely supply chain, while improving its customer-center merchandising and in-store execution. It has plans to enhance customer experience by increasing employee presence at the front end of its stores and ensuring that its associates provide increased engagement to customers. It is also focusing labor hours on perpetual inventory management to facilitate its sales growth and improve in-stock levels.
Dollar General (NYSE:DG) is currently trading at a forward P/E of 14.23 at a 21% discount to its sector. 42 hedge funds hold stakes in the stock as of Q2 2024. Artisan Value Fund stated the following regarding Dollar General Corporation (NYSE:DG) in its fourth quarter 2023 investor letter:
“Our biggest full-year detractors included energy holdings Schlumberger and EOG and 2023 purchases Baxter International and Dollar General Corporation (NYSE:DG). Dollar General, a discount retail chain in the US, has dealt with a few struggles. The retailer had previously benefited from COVID stimulus checks, reflected in the bump it experienced in revenues and margins.
However, the effects have worn off, and its core consumer has been hurt by inflation, stiffer economic conditions, lower tax refunds and reduced SNAP benefits. Margins are also under pressure due to labor costs, shrink and markdowns. Some of the issues are likely self-inflicted. After years of focusing on store growth to drive the top line, store standards have suffered. Addressing store standards is needed to turn around flagging traffic, comps and customer satisfaction. On the positive side, discount retail due to its trade-down feature tends to be a defensive business during economic slowdowns.
Dollar General has a strong market position and faces less competition than other discounters due to its largely rural footprint. The business’s value proposition is everyday low prices, a convenient format, and proximity. The company has leverage due to capital expenditures, but interest coverage of ~9X is strong. From a valuation perspective, the froth from the pandemic, when it traded in the low- to mid-twenties, is gone. So, we aren’t paying for margin upside or store growth. Those would be bonuses. If the company can continue to grow revenues, generate cash flow, and buy back stock, we still see a path to success.”
