Dollar General Takes a Page From Dollar Tree's Book

In this episode of MarketFoolery, Mac Greer talks with Fool analysts Emily Flippen and Ron Gross about some of today's business news. United Airlines' (NASDAQ: UAL) CEO is stepping down, but at least the succession plan seems smooth. Shares of Five Below (NASDAQ: FIVE) popped on earnings. How long can the company go before it has to change its name? Slack (NYSE: WORK) shared a bit of a mixed bag of a quarterly report; Emily presents her bull case for the company's long-term future. And Dollar General (NYSE: DG) is up a little on earnings, but its focus on their DG Fresh initiative isn't necessarily a slam dunk. Tune in to find out more.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on Dec. 5, 2019.

Mac Greer: It's Thursday, December 5th. Welcome to MarketFoolery! I'm Mac Greer and I am joined in studio by Motley Fool analysts Emily Flippen and Ron Gross. How are we doing this Thursday?

Emily Flippen: Hey, alright!

Ron Gross: How are you, Mac?

Greer: I'm good.

Gross: Thanksgiving was good?

Greer: Thanksgiving was good. I may have overindulged. There's no may.

Gross: You were over-served?

Greer: Yes, exactly, I was over-served, but I'm bouncing back. I'm feeling good, feeling rested. On today's show, we're going to talk some Slack. We're going to talk some Five Below and Dollar General.

But we begin with United Airlines. CEO Oscar Munoz is stepping down in May after four years as CEO. United president Scott Kirby will become the new CEO. We're going to talk about him, because he's known for his operational savvy. Now, Emily, it has been quite the tenure for Oscar Munoz. He takes over in 2015. A month later, he has a heart attack. In 2017, there's that incident that you may remember where security officers drag the passenger off the United flight that was oversold. Remember that?

Emily: I think everybody remembers that.

Greer: Captured on video, of course. Not so good. Munoz was criticized for the way he handled that, for his lack of empathy. So, there are some issues. But business has been good for United. Growing profits, growing capacity, and a growing stock. Shares up more than 50% over the last four years.

Flippen: Anytime you get a new CEO in, and within a month they have a heart attack, you know things maybe aren't the best.

Gross: And, by the way, a heart transplant as well. Not just a run-of-the-mill heart attack.

Flippen: Good Lord! So, yes, something was going on at United. I think Munoz was clearly made aware of it his first month there, and it didn't take him too long before he actually hired on Scott Kirby as president. Scott Kirby transferred from American Airlines, which was actually a big move at the time because American Airlines was the bigger airline. So Kirby making that move said one of two things. It said either he saw more opportunity in United, or, more likely, he saw more opportunity for promotion at United. And we see that happening now.

It wasn't really an unexpected transition. A lot of the initiatives that have really helped United over the past few years were actually Kirby's initiatives. He took over a lot of the operational expertise. And while the unfortunate incident with the doctor being dragged off the United plane was not a good look for anybody in that situation, I will say that United seems to have made some changes to the culture, made some changes to the way that they treat their customers, the way they treat their employees, that seems to have improved that experience over time. I probably shouldn't say that on air because, you know, give United a month they'll be dragging somebody else off. But, as of right now, it seems like that problem's largely been solved.

Gross: I think if you're a shareholder, you've got to be pretty pleased with the succession plan. Kirby's really solid. They're not going to lose a beat here. And the airline industry will probably have to deal with a weaker economy going forward, labor issues, the 737 Max is still an issue. United has, I think, 14 of those. So there'll be headwinds to deal with, and I think Kirby's the right guy to handle them.

Greer: Do we have a favorite airline stock going forward? We talked about United being up more than 50% over the last four years. Is there a leader in the clubhouse right now?

Flippen: I love talking about all my cheap discount airlines, because I know everybody else hates them, but I'm a big fan, at least, of flying Spirit. I know Wizz Airlines, the Hungarian budget airlines -- I don't want to say cheapo airlines. Budget airlines is a nicer way to say that. Both of those are publicly traded companies and I think great businesses because they cater to what is increasingly a commoditized business. That's what airlines ultimately are selling. We have an employee here, Tom, from South Africa, and he mentioned how often flights are delayed in the U.S. versus South Africa because we have so many people flying. It's so much more accessible to the average person in the U.S. to fly as opposed to take a train or drive. So, I feel like long-term, we have a business that's really not going anywhere. I agree with Ron, though, it's kind of a cyclical business.

Gross: Yeah, I don't know from a stock perspective which I like best, but I've always been a big fan of Southwest, just the way they do things from a customer's perspective. Really the only company that will allow me to switch my flights without hitting me with a big, huge penalty.

Greer: Isn't that wonderful?

Gross: It's such a pleasure. That wins me loyalty. They get my loyalty right there, from that alone.

Greer: I'm with you, Ron. My only beef with Southwest is, I don't always pay to have the automatic check-in. But, what I like to do is be there right then.

Gross: My family makes fun of me like you wouldn't believe.

Greer: It's so satisfying to get into the A group or the early B group, right? Well, recently for Thanksgiving, I was on it. I was on it within a second, right when the clock changed, and I was like B40.

Gross: It's because everyone else paid for the early bird special.

Greer: Exactly. So, tells me that the early bird is about to go up. Because it's not working. I should be rewarded for my moxie, for getting in there quick, and I wasn't. I predict that within a year or two, they raise the early bird to $50. It's $25 now.

Gross: It's already kind of expensive, I feel. So, if they jack it up, it will definitely decrease the amount of usage, I think.

Greer: Well, these are the things I think about.

OK, let's talk some Slack, the cloud-based messaging platform. We use it here at The Motley Fool. Slack reporting better than expected earnings after the market closed on Wednesday, but some concerns over higher than expected losses. Shares down a bit today. Emily, what do you think of Slack?

Flippen: Slack had a good quarter. They only lost $0.02 per share versus the $0.08 that was expected.

Gross: Getting closer.

Flippen: Yeah, they're getting closer. They're getting there. Not quite there in terms of being a profitable business yet. And while, of course, there's always concerns about growing costs when you have a business that is a growth company that's scaling the way that Slack is scaling -- and it is really important for them right now to just get customers. They're in that customer acquisition mode. I think the bigger concern has always just been around Microsoft (NASDAQ: MSFT) Teams. I mean, that within itself has been such a hot button discussion point ever since Slack went public. Microsoft Teams is rapidly catching up with the number of active users on Slack. Teams just reached 20 million daily active users. And everybody's pointing to the fact that, look, if you're a company, you likely already pay for Office 365. Microsoft Teams is free. It has all the functionality of Slack. Why don't you just use it? It's an interesting question.

But in the last quarter, Slack said there are more than 50 customers now spending more than $1 million a year for their platform, which I think says a lot about one thing, which is the inefficiency of businesses. If there's something a business can pay for that they don't need to pay for, they'll probably pay for it. I looked here at The Motley Fool, for instance. Look, we pay for Office 365. Office 365 can do a lot of things, like document management. We still pay for that outside. We don't put everything on Microsoft, even though it would be cheaper and entirely possible for us to do so. So, I have no reason to believe that enterprise customers would take something just because it's free. I think that's actually an advantage for Slack.

Greer: I should clarify. I mentioned that there were some concerns over higher than expected losses. What I should have included is higher than expected losses going forward. Emily, as you mentioned, their losses right now, actually not as bad as expected.

Now, you mentioned Microsoft. Ron, Slack CEO Stewart Butterfield says that Microsoft Teams had weak engagement and that he expects more users to migrate over to Slack. So there you go, right?

Gross: It's interesting, because lately -- I don't know why, probably because I updated something -- Teams is popping up on my computer automatically, and I'm x-ing it out every day. But there'll come a point in time where I'm not going to X it, and I'll try to figure this thing out. But, of course, I would need my colleagues to do the same as well.

Flippen: I did that. Two of us on the investing team -- it's me and Seth, which, if you're familiar with Seth and I, you might expect. Seth is really trying to get us to use Microsoft Teams because he's like, "It's the same thing as Slack and it's free." And I know if Seth is upset about something, we're in no way going to start using Microsoft Teams anytime soon, because Seth does an amazing job of pointing out all the ways that we're inefficient, and we do an amazing job of ignoring him. He kind of says the same things about Peloton, about how bad their bikes are in comparison to cheaper bikes that you can get elsewhere that do a lot of the same functionality. And I'm like, yeah, but it's not Peloton, and it's not Slack. I use the product, it's essentially the same product, but I don't see a lot of people migrating over.

Greer: OK, let's talk about the stock. Slack IPO-ed back in June at around $26 a share. The stock rose more than 60% on its first day of trading, going over $40. Today, trading around $22. So, it has lost all of that and then some. So, what about the stock going forward?

Flippen: I'm actually a fan of Slack. Maybe I'm the wrong person to have talking about this. I mean, it's clear that I think that it has a lot more potential moving forward than the market is pricing in right now. I think a lot of fear around both their unprofitability -- they're guiding for, I think, $0.06 to $0.07 loss next quarter, so a bigger loss next quarter. Additionally, rising competition has a lot of people scared. But, yeah, I just see a really, really sticky platform that has a lot of optionality still left in it.

Gross: It's interesting. In this high-tech world we live in, Slack just gave us the ability to boldface and italicize things.

Greer: I love that feature, by the way.

Gross: It's interesting, they went public without the button to click the boldface something. But now we have it, and it's a game-changer.

I actually think a lot of folks are using Slack, including us, incorrectly. I think Slack is great for quick hits, quick conversations, quick questions, quick answers. It shouldn't be used for project management, for ongoing projects. Things get lost way too easily.

Greer: So, not a substitute for email?

Gross: In my mind, not for projects, absolutely not.

Greer: OK. Back to the bold/italics. What are you going with between the two? What's your favorite?

Gross: [laughs] If I have a favorite, I guess it would be bold.

Greer: Really? Sometimes I feel like bold is almost too bold.

Gross: [laughs] Like a bald light?

Greer: Yeah, it's like I'm almost yelling. It's not quite all caps, which I've been known to do, inadvertently, which is like old man font. I think italics is a little smoother. But no one would call me smooth. Bold is good.

OK, let's move on. Let's talk retail. Shares of Five Below up around 5% after the retailer reported better than expected earnings, but it also gave weak guidance, predicting a new round of tariffs. What do we think of Five Below?

Greer: In and of itself, the quarter indicates a strong business. Comp sales up 2.9%, net sales up 21%. On the cost side is where they struggled. As some other retailers have done, they are blaming tariffs and other merchandise costs. They see that continuing, at least for some time in the future. As a result, you had net income actually get hit, down 24% year over year. So, not a great result there, due to the higher costs.

They did raise the low end of their full-year fiscal 2019 guidance, which is interesting. They didn't raise the entire guidance. Stock trading at 40X now, though, after having a decent year, up about 20%, but over the last five years, a pretty strong company to have owned. 40X for a company like this is pretty pricey. This is not some high-tech company.

Flippen: Did anyone else see you they're raising their prices? Everything's not going to be five below anymore.

Greer: Yeah!

Flippen: Yeah, what is that?

Gross: They're testing a Ten Below gift shop, which is mostly focused on toys and games. Hard to find toys and games of substance for under $5. I guess they do want to offer those to customers, so they're trying out the Ten Below. We'll see how it goes.

Greer: Doesn't the name hamstring them at some point, though?

Flippen: That's exactly what I was thinking! They're screwed! [laughs]

Greer: If you start having more and more items over $5, you can't call yourself Five Below.

Flippen: Although, you know what? Dollar Tree, Dollar General, those stores, started off as dollar stores, and now they just kind of sell everything, and everyone seems to be totally fine with it. Maybe at some point, Five Below will be just be your discount retailer, and be OK.

Gross: They could just add an asterisk to the end of the name.

Greer: I like that!

Gross: Rather than rebrand the whole thing.

Greer: What I was thinking along those lines, Ron, is you get rid of the E and the 5 -- you have to get rid of the V, too -- and make it Fifty Below.

Gross: Room to grow?

Greer: Room to grow, Fifty Below. Everything is $50 or less. But maybe that doesn't have the same appeal. I don't know, I think the name will hurt them at some point.

Gross: Maybe, but they're doing well. They continue to open up stores at a pretty good clip. They opened 61 new stores, ended the quarter with almost 900. And, as we said, comp sales are relatively strong. The company is doing fine. Tariffs will work their way out at some point.

Greer: We had the opportunity to meet with their leadership team a couple years ago in Philadelphia as part of an internal development program here at The Fool. I was just blown away. Incredibly, incredibly impressive. As you mentioned, Ron, the stock over the last five years has just absolutely crushed it. So, there you go.

And we close with another retailer. A good day for Dollar General. Shares up a bit on better than expected earnings. Ron, the best quarterly same-store sales growth in nearly five years. Dollar General also raising their full-year forecast.

Gross: 4.6% is a pretty strong number, certainly better than Dollar Tree, with owns Family Dollar, which we discussed last week. This is certainly the better of the two companies. They increase both average transaction amount and customer traffic. Earnings per share increased about 13%. They're aggressively opening new stores, creating private labels, adding food, health and beauty products. The company's executing well.

They did talk about tariffs, as Dollar Tree did last week, to a very large extent. Dollar General, not so much. They did take it into account in their future guidance. As you said, they did raise that guidance. I think they're able to shake off the impact of tariffs much better than a company like Dollar Tree because they're a better-run company, they're a more stable company, they're a stronger operating company. So, the impact isn't as significant. But, it still is there.

Greer: Emily, what do you think?

Flippen: Dollar General is an interesting one, because it's definitely, as Ron mentioned, outperformed its competitor, Dollar Tree. And it all goes back to that acquisition that Dollar Tree made of Family Dollar. Here's my problem. Dollar General is putting a lot of emphasis on their new initiative, DG Fresh, which is essentially Family Dollar.

Greer: You say that as if you're skeptical.

Gross: You can't say it skeptically and then... Yeah, come on, give it a shot!

Flippen: DG Fresh is a really cool initiative by Dollar General, that's going to really hurt their bottom line over time. No, it's actually kind of concerning. They keep pointing to same-store sales, and they're saying that the DG Fresh initiative, which is essentially putting more fresh produce and more grocery items and coolers into their stores, is going to increase foot traffic.

Greer: I think that's a good thing, though. I think for people who primarily rely on Dollar General, that's a smart move. And maybe in the short term, they take a hit, but in the long term, I'm all over DG Fresh.

Flippen: Here's the thing. We see Family Dollar, which tried that initiative a while ago -- granted, it's worse managed, and their locations are arguably in worse locations, so there are some differences there -- but, we see that being a horrible, low-margin business. What you want to be is, you want to be Five Below. You want to have a good feeling associated with that. You want to take the near billion dollars they're investing to put coolers into all their stores, and invest that in things like digital initiatives instead, improving that customer experience. My problem is, they lose money on these types of products, and they're doing it to increase foot traffic under the idea that when people come in, they'll purchase other things. They're coming in for milk and maybe they'll buy something else, they'll buy a shirt or whatever other junk that they see --

Gross: [laughs] Junk?

Flippen: [laughs] Stuff, whatever other stuff they see, and that'll increase their same-store sales. But, we already saw margins shrinking this quarter. And when you have more sales associated with consumables, these products that really have short shelf lives and are really low-margin products -- that's a long-term concern to me.

This is all kind of playing devil's advocate. As Ron and you mentioned, Dollar General has been a great investment over the past few years. But I'm just kind of skeptical about this new initiative.

Greer: But it feels like they're playing the long game. We see Target building out their groceries. If I'm in an area where Dollar General is the only retail option I have, or it's my primary go-to, then that can only be a good thing for me as a consumer. But what you're saying, Emily, is that that could really hurt the bottom line, right?

Flippen: Yeah, it can really hurt their bottom line. They expect it to be accretive as early as 2020, which to me just says they're spending a lot of money now and they're not making money on that initiative, now. You see them pulling back inventory in a way of keeping their cash flows up at the same time, and that kind of manipulation does concern me.

Greer: Ron, do you have any strong thoughts on DG Fresh? I know you liked his first album.

Gross: [laughs] I'm old school, yeah. I think it's all going to be in the execution. It will be expensive upfront, for sure. Whether that upfront cost returns a proper return on investment will remain to be seen. I can see both sides of your story here. I'm going to be intrigued to watch what happens.

Greer: OK, well played. Very diplomatic.

Gross: Thank you!

Greer: If you have any strong thoughts on DG Fresh, Dollar General, Five Below, Slack, United Airlines, the future of email, you can always email us at [email protected]. 

Ron and Emily, it is time for the much celebrated, or never celebrated, desert island question. You're looking at these four stocks, and you have to buy one for the next five years because you're on a desert island, you really don't have a lot going on. United, Slack, Five Below, or Dollar General?

Gross: Hmm. Emily?

Flippen: I'm going with Slack. I've pitched this company a couple of times. I think it's a really strong business. I think it's a really sticky business. I think there's a lot of optionality that's still left in the platform aspect of Slack. It's riskier, I'll say that. It's unprofitable. A lot of issues there short-term. But I'm a believer long-term.

Gross: I'll take the more boring side of the trade and go with Five Below. I like what they're doing. I like their execution. I think it'll continue into the future.

Greer: No respect for DG Fresh.

Gross: Not today.

Greer: As always, people on the show may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. Emily and Ron, and thanks for joining me!

Flippen: Thanks for having me!

Gross: Thanks, Mac!

Greer: That's it for this edition of MarketFoolery. This show is mixed by Dan Boyd. I'm Mac Greer. Thanks for listening! We will see you next week.