5. Dollar General Corporation (NYSE:DG)
Number of Hedge Fund Holders as of Q2 2024: 42
Dollar General Corp (NYSE:DG) is an American retailer with a chain of stores across Mexico and the US. It offers a range of discounted merchandise, consumable products, and non-consumable items such as seasonable merchandise. The company operates around 20,000 stores and plans to open more than 800 stores across the US. It also announced plans to remodel around 1,500 locations and relocate 85 stores in 2024.
It is making significant progress on its back-to-basic plans, with net sales increasing by 4.2% to $10.2 billion in fiscal second quarter of 2024 compared to net sales of $9.8 billion in fiscal second quarter of 2023. Dollar General Corp’s (NYSE:DG) top priority is to improve its on-time and in-full truck delivery rates, which it refers to as OTIF. The company’s focused efforts have led to significantly higher OTIF levels compared to last year, with improvements in both fresh and traditional supply chains.
It has also made significant progress in optimizing its distribution capacity. It is closing the less efficient temporary facilities, and building and opening two new permanent distribution centers in Colorado and Arkansas. The company expects to ramp up operations in the coming months, positively contributing to reduced transportation costs and a reduction in stem miles over time.
Dollar General Corp (NYSE:DG) is also undertaking the first full-scale refresh of its sorting process within its distribution centers since the launch of its Fast Track initiative in 2017. The ultimate goal of this initiative is to enable its store teams to stock shelves quickly, driving greater on-shelf availability for its customers and boosting ongoing sales growth. It has made significant progress on this front, and is on track to complete it by the end of the year.
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.”
