Dollar General (DG -0.41%) has a fairly simple business model in the retail sector. It sells everyday products at reasonable prices to local customers, much like the corner store did years ago. But things aren't going well for the discount chain today, and investors are reacting as you would expect. The question for those with a long-term view is whether or not Dollar General's business is broken or just going through a rough patch.
Dollar General's shares plunge
Since the start of the year Dollar General's stock has fallen roughly 55%. That's a massive decline in a fairly short period of time. It isn't alone, with main competitor Dollar Tree (DLTR 0.04%) also seeing declines this year. The problem is that Dollar Tree's shares are down about half as much, with a drop of "just" 26%.
Clearly, neither of these retailers is in favor on Wall Street today. But it is also obvious that Dollar General, and its suffering shareholders, are worse off. If there's one number that helps explain what's going on it is same-store sales. This figure looks at sales for stores that have been open for at least one year. Dollar General's same store-sales growth in the second quarter was negative 0.1%. By comparison, same-store sales at Dollar Tree rose 6.9%. No wonder investors are extra negative about Dollar General right now.
Adding to the concern is that Dollar General lowered its full-year guidance. That's the second quarter in a row that the retailer has done so. This suggests that things are getting worse, not better, at the moment.
What does the long-term story look like?
Clearly, investors are worried about the near-term future. Particularly troubling is that the company's largely less wealthy customer base appears to be pulling back. That's shown by the strength in the company's consumables sales (think toothpaste) even as it is seeing weakness in things like seasonal goods and clothing. This is an important dynamic to watch.
Basically, Dollar General uses low-margin consumables to draw customers into the store. It then hopes that customers will spend on higher-margin items like seasonal goods. If that's not happening, it hurts margins -- and more importantly, it hints that Dollar General's customers are hunkering down. As long as that situation persists, Dollar General's results are likely to remain weak.
And yet, more aggressive investors willing to invest in turnaround situations might want to take a closer look at the stock. It is not a slam dunk, but the basic business model doesn't appear to be broken. It seems like the current problems are more related to the economic pressures its core customers are facing. That's not a good thing, of course, but at some point the situation will likely reverse.
The real question, then, might be better viewed as when should more aggressive investors consider buying Dollar General? Right now, with the company's results continuing to be weak, probably isn't the right call unless you have a very strong tolerance for risk. But management is investing in the business in the second half of 2023 to improve inventory levels and enhance the customer experience. If those efforts are successful, the company could start to gain back disillusioned investors.
And the key metric to monitor is same-store sales. It would be notable if Dollar General could get its same-store sales figures moving toward the far better results of Dollar Tree. If that happens, investors might want to take a second look here.
Tread with caution, but be open minded
Dollar General is not a stock for the faint-hearted, as business performance is pretty bad right now. But there's opportunity for improvement if management can muddle through the current headwinds facing its core customer base. More aggressive investors might want to watch this stock for its turnaround potential, with special attention paid to same-store sales.
