It's been a rough year for Dollar General (DG -0.41%), and by extension, for its shareholders. The discount retailer's stock is down more than 50% from last November's high after the company misjudged the amount of pent-up consumerism that would be unleashed coming out of the COVID-19 pandemic. It bought up more inventory than it could sell in 2022, forcing heavy markdowns between then and now.
Dollar General's habits of understaffing stores and allowing merchandise to pile up in stockrooms have also been well exposed in the meantime -- never mind the oversized toll that lingering inflation has taken on the store chain's core customers.
Investing isn't always a straightforward science, though. There's an art to it, too. That art includes being able to spot a stock on the verge of a recovery because the underlying company is nearing a much-needed turnaround.
That's arguably where Dollar General sits at this time, and why the stock looks like a solid buy today.
Dollar General is positioning for a turnaround
As professional hockey great Wayne Gretzky explained of his success, "I skate to where the puck is going to be, not where it has been."
The premise doesn't just work within the confines of a hockey rink, however. It applies in many facets of life, including investing. You don't own shares of a company based on that company's history. You own a stock because of where that company is going.
Enter Dollar General.
There's no denying the discounter was caught with its proverbial pants down as the coronavirus contagion abated. Not only did it buy too much inventory back in 2022, it didn't have the space to securely store what it bought. Indeed, the retailer was forced to book write-downs in the latter part of last year because winter weather damaged some inventory.
DG Revenue (Quarterly) data by YCharts
Several stores have also been shut down by local fire marshals within the past couple of years because in-store merchandise was blocking fire exits. All of it points to suggests management is out of touch with what's happening at the store level.
If you're keeping your finger on the pulse of how Dollar General's top brass is responding, however, you'll sense a certain degree of desperation -- even fear -- that often precedes change.
Case in point: The company's got a new CEO. Last month, the board of directors appointed industry veteran Todd Vasos to the position.
If you're familiar with Dollar General's history, you already know this isn't Vasos' first go-around as Dollar General's chief executive officer. He's responsible for much of the retailer's store growth, having been at the helm between 2015 and late last year. Although many of the company's current operational challenges were allowed to materialize under his first round of leadership, there's arguably nobody more familiar with what the company's become.
A rehired CEO alone isn't enough to change a struggling retailer's fortune, of course. It will need to address the specific problems that ail it as well.
To this end, during the company's third-quarter earnings call held in August, Dollar General announced it was raising its planned increase in annual labor spending from $100 million to $150 million. It's also investing $25 million in tools like demand forecasting. This should stave off inventory problems like the one it stumbled into last year.
The discount store chain is also lowering the price of some of its most basic goods in an effort to draw more shoppers into its stores.
Take these measures at face value, but also read between the lines. They're apt to be just a handful of the bigger, more meaningful efforts the company is making. There are dozens (if not hundreds) of smaller but meaningful corresponding moves also being made.
If it's obvious, it's too late
Still, it's tough to get excited about stepping into shares of a company that isn't yet decidedly in turnaround mode. Last quarter's same-store sales were flat, for instance, and earnings were down. The current quarter's and the full year's revenue should more or less be in line with year-earlier comparisons, while earnings are expected to remain on the order of about one-third lower than what they were a year ago.
All of this bad news, though, is arguably already reflected in the stock's depressed price -- and then some.
That idea isn't easy to quantify. Pointing out the current consensus price target of $126.40 is above Dollar General stock's present price near $117 doesn't quite seem to do the trick by itself. These analysts' revenue and earnings growth forecasts for the coming year don't completely solidify the case, either. The trailing-12-month price/earnings ratio near 12 is relatively low, but it's been low for a while now, to no avail.
Data source: StockAnalysis.com. Chart by author.
Now combine all three of those factors, and then consider how all stock picks are ultimately a bet that the underlying business will thrive in the future, regardless of if it has in the past. That's a judgment call based on perceived risks and prospective rewards. If you can look past all the recent noise, Dollar General brings more of the latter to the table and less of the former.
The one thing you don't want to wind up doing is waiting too long, only to end up watching Dollar General's stock race higher once the rest of the market figures out that this retailer's turnaround plan is gaining traction. Great investors look into the future, not the past. Skate where the puck is going, not where it was.
