Investing great Warren Buffett often explains that he only invests in companies he can understand -- companies inside of his "circle of competence." And that's why I want to highlight discount-retailer Dollar General (DG 0.01%) and shoe company Crocs (CROX 0.64%) as potential investment opportunities. Both are good buys and, more importantly, both businesses are simple to understand.
Investors don't win any points for complexity. For stock-pickers, what matters is beating the market. And simple ideas like Dollar General and Crocs can do that. Here's how.
1. Dollar General
Dollar General sells an array of common household items at low prices, and chances are you've shopped at one of its stores at some point. After all, the company just opened its 19,000th location this January, meaning there's at least one location nearby for most people in the U.S.
That's the beauty of Dollar General. Its stores are conveniently located for a wide swath of the U.S. population. And its everyday merchandise is always in demand. Consider that sales per existing Dollar General location -- known as same-store sales -- have only gone down once in the past 30 years. This was in 2021 and the only reason same-store sales fell was because they jumped a whopping 16.3% in 2020 -- it was a hard year-over-year comparison.
Back in 2016, Dollar General management said that the payback period for new stores is under two years. It hasn't had an investor-day presentation to update this figure. However, it's likely still a quick payback period because these stores are pretty simple. In other words, the company doesn't have excessive capital requirements.
In addition to being a simple concept, Dollar General is profitable. Through the first three quarters of 2022, the company's net profit margin is 7%. And with limited capital requirements to keep the business growing, management returns a lot of money to shareholders, as the chart below of dividends and share reduction via repurchases shows.
DG Average Diluted Shares Outstanding (Quarterly) data by YCharts
Dollar General plans to open more than 1,000 new locations in 2023, intends to keep paying a dividend, and is authorized to use $2.5 billion to repurchase shares. In other words, everything that's made Dollar General a market-beating stock appears to still be in place. That's why using $1,000 to buy about four shares of this company could be a great idea.
2. Crocs
In Crocs' investor presentation, the company says it values "inherent simplicity" and goes on to say, "We know smart doesn't have to mean complicated." This is probably a good motto for anyone who smartly bought the stock five years ago -- shares of Crocs are up more than 800% during this time and this is still just a simple shoe stock.
The unsung hero for Crocs' business has been management's ability to expand its operating profit margin from the low-single digits to now over 24% -- close to its long-term target of 26%.
CROX Operating Margin (TTM) data by YCharts
Five years ago, Crocs started cutting costs by closing locations, stopping sales to discount channels, and leaning into e-commerce -- something that works particularly well for Crocs considering its shoes are lightweight for shipping. It's still finding efficiencies in its business today. And its surging profitability has afforded the company new options.
For example, Crocs acquired shoe brand Heydude at the end of 2021. According to a recent Piper Sandler survey, Heydude is the seventh-most popular shoe brand among teenagers, jumping two spots since the previous survey. Crocs spent $2.5 billion to make the acquisition. But it affords it a high-growth brand rising in popularity. And in less than one year since the acquisition, Crocs has already paid back $500 million.
Crocs expects to report 53% year-over-year revenue growth for 2022 thanks in part to its acquisition of Heydude. And for 2023, trends point to double-digit growth yet again, potentially resulting in $4 billion in full-year revenue.
If Crocs is able to achieve management's goal of a 26% operating margin, then it could earn over $1 billion in operating profit this year. With a market capitalization under $8 billion, Crocs looks reasonably valued even after its recent surge.
Moreover, Crocs' management is targeting over $6 billion in annual revenue by 2026 -- roughly 50% two-year growth after this year. That will likely be enough for ongoing market-beating growth. Which is why I think investors would be smart to take $1,000 and buy eight shares of Crocs to go with their four shares of Dollar General. These two stocks could help form a nice foundation in a diversified portfolio.
