What happened
Dollar General (DG 0.83%) may have been a winner during -- and even shortly after -- the crisis phases of the COVID-19 pandemic. As the dust continues to settle, though, the discount retailer's underlying problems are increasingly being exposed. And investors' recognition of those helps explain why the stock fell 31.1% through the first six months of this year, according to data from S&P Global Market Intelligence.
So what.
Every retailer struggles with its own unique constellation of challenges. For Dollar General, the biggest headaches involve inventory and personnel: It has too much of the former, and too little of the latter.
Since 2017, the company has been cited many times by the Department of Labor's Occupational Safety and Health Administration (OSHA) for leaving merchandise blocking fire exits as well as for unsafely stacked boxes -- citations that led to more than $15 million in fines. While OSHA's underlying concern is safety, these inventory pile-ups ultimately suggest that the company frequently has more merchandise in its stores than they can effectively handle, and/or doesn't have enough employees in those stores to effectively manage all the goods being shipped to them.
These challenges are now being addressed. During the company's Q1 earnings call in June, CFO Kelly Dilts reiterated that an additional $100 million in spending had been earmarked for stores, and specifically, for hiring more store workers.
That said, the damage has already been done. Customers, employees, and even shareholders now have their doubts about Dollar General, and the latter group proposed in-store safety audits at the most recent annual shareholder meeting.
NYSE: DG
Key Data Points
In the meantime, business is just bad. Same-store sales improved by an anemic 1.6% in Q1, and management now expects full-year same-store sales growth of between 1% and 2%. Operating profit margins also fell on the order of 50 basis points during Q1, driving a 2.9% year-over-year decline in earnings per share. Based on its recent results, Dollar General believes this year's bottom line could fall by as much as 8%.
The kicker: The company's already-bloated inventory levels were up another 14.7% year over year in the first quarter, far exceeding sales growth.
A major piece of the stock's first-half decline occurred immediately after the release of the Q1 results.
Now what
The discount retailer can turn things around. In fact, it likely will turn things around.
However, that will be no easy or rapidly completed task.
Take its staffing woes, for example. Dollar General operates nearly 20,000 stores, many of which have been managed in a particular way for years now. Changing how these remote locations are staffed and run could prove difficult.
The same applies to inventory procurement. The company understands it needs to refine its merchandise management paradigm. It has even hired former Wayfair (W 2.62%) executive Peggie Fort to overhaul its inventory management approach. Her official title is vice president of inventory and demand management. Nevertheless, she'll first have to unwind the company's existing procurement process and habits.
Dollar General is certainly a turnaround prospect worth keeping on your watch list. But it's not a must-own name right now.
