6. Dollar General Corp. (NYSE:DG)
Number of Hedge Fund Investors: 42
Goldman Sachs has removed Dollar General Corp. (NYSE:DG) from its Americans Conviction List, and Barclays has reduced its price target for the stock from $154 to $102. This follows Dollar General Corp. (NYSE:DG)’s recent cut to its full-year guidance, indicating serious challenges for the discount retailer. Jim Cramer believes that Walmart Inc. (NYSE:WMT)’s strong performance is contributing to Dollar General Corp. (NYSE:DG)’s difficulties.
“Goldman Sachs pulled Dollar General from its so-called Americans Conviction List, while Barclays slashed its price target on the stock to $102 from $154. Just a really bad situation for the discount retailer, which cut its full-year guidance last week. I think Walmart’s success is partly to blame for Dollar General’s struggles.”
Dollar General Corp. (NYSE:DG) is an appealing investment due to its resilient business model and strong performance in both robust and challenging economic conditions. As a leading discount retailer, Dollar General Corp. (NYSE:DG) attracts value-conscious consumers by offering a wide range of affordable essentials. During economic downturns, Dollar General Corp. (NYSE:DG)’s focus on low-cost products drives increased foot traffic and sales as consumers seek to save money.
Dollar General Corp. (NYSE:DG)’s extensive network of over 19,000 stores across 47 states and its ongoing expansion into underserved rural and suburban areas give it a competitive edge and boost market penetration. Dollar General Corp. (NYSE:DG)’s strong financial performance, marked by steady revenue growth, solid margins, and robust cash flow, reflects its efficient operations and cost management.
Investments in digital and e-commerce, such as the DG Pickup service and the DG Fresh program, enhance customer convenience and position Dollar General Corp. (NYSE:DG) to benefit from the growing trend of online shopping. Dollar General Corp. (NYSE:DG)’s defensive nature makes it particularly attractive during economic uncertainty, as its focus on essential, low-cost products remains appealing when consumer budgets tighten.
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.”
