Dollar General (DG -0.41%) has been one of the worst-performing stocks on the S&P 500 this year, losing just over half of its value thus far. What has in the past been a fairly stable investment has looked catastrophic this year. It's not all the company's fault, however, as rising interest rates and inflation are weighing on consumers.
But the situation is concerning as the stock is clearly underperforming an already weak market. As a result, the company made a change in CEO, bringing back Todd Vasos this month. Will the move help fix Dollar General's problems, and can it help turn things around for this beaten-down stock?
Dollar General has been struggling
Dollar General and other retailers got hit with significant headwinds in 2023 as consumers dealt with elevated inflation, which still isn't firmly under control. And despite being a discount retailer and potentially appealing to shoppers on a budget, the company's revenue growth was lackluster and it's well below the company's 10-year average:
DG Revenue (Quarterly YoY Growth) data by YCharts
Along with struggling sales growth, the company's bottom line hasn't been this low in three years. Rising operational costs are putting pressure on earnings.
DG Net Income (Quarterly) data by YCharts
In two of the past four quarters, the company also generated negative free cash flow. That's not a good thing for a business that is always opening more stores and also pays a dividend.
There's no shortage of issues for the new CEO to address, and it won't be easy.
Can Dollar General's new CEO fix the problems?
On Oct. 12, Dollar General announced that Todd Vasos, a member of the company's board and its former CEO, would once again be taking over, replacing Jeff Owen. He was previously in charge from June 2015 to November 2022. In a press release, the company stated, "the Board has determined that a change in leadership is necessary to restore stability and confidence in the Company moving forward." The change was effective the same day as the announcement.
There are multiple areas where a leadership change might be helpful. Regarding growth strategy, new leadership could potentially scale back on the opening and remodeling of stores in an effort to curb spending and limit outgoing cash flow. Last quarter, which ended Aug. 4, the company managed nearly 850 real estate projects, spending millions on upgrades and remodeling stores. To be clear, Vasos hasn't said whether he would cut back on those types of expenditures.
Another way Vasos can help is to get a tighter grip on forecasts. If there's one thing investors hate to hear, it's that a company is slashing its guidance. Dollar General has done that multiple times this year. Repeated guidance changes don't instill much confidence in management.
Still, there are many factors the CEO doesn't have control over, including macroeconomic conditions. Inflation remains a problem, and the resumption of student loan repayments may only make things worse for consumers struggling to make ends meet. A change in CEO can help some things, but it won't fix all the problems ailing Dollar General's business right now.
Is Dollar General stock a buy?
Under Vasos, Dollar General's business thrived, with its market cap doubling and revenue soaring over 80% during his previous tenure as CEO. With the previous CEO back in charge, investors can have some confidence that the business is in good, experienced hands. But there will still need to be patience. A change in CEO isn't going to stop inflation and it won't improve the financial condition of Dollar General's customers. It will be a tough road ahead, but investors should have renewed confidence that the business will be OK.
Dollar General's stock trades around the levels it was at in 2019 and with a price-to-earnings multiple of around 12, it's not an expensive investment to own. There's a good margin of safety here for investors should the business continue to struggle. And in the long run, there's some deep value here that can lead to great returns for investors who are willing to buy and hold.
Returning to its old CEO may not fix Dollar General's problems overnight, but it could ensure the retail company is back on the right path and making the best decisions possible for the business in light of the challenging macroeconomic conditions that exist today.
