Thursday, September 14, 2006

Tom Joad’s Truck

One of Wall Street’s Finest is today reiterating a “Buy” rating on Dollar General, mentioning, among other things, ‘store environment enhancements’ according to the summary email I received this morning.

Dollar General, as you may know, is a former high-flyer retailer and one of the original so-called dollar stores that blanket the country—in particular, the south. Yet the company's stock price has done nothing for a decade.

(I do not exaggerate. At $13.67 last sale, shares of DG trade precisely where they traded ten years ago this month, with a brief visit to $25 and an equally brief stop at $10 in between.)

Whether DG is a value here is anybody’s guess, but I will wager the analyst in question and her one or two other fellow Dollar General bulls on the Street have not seen the half a dozen stores I recently viewed in the heart of Dollar General Territory.

To quote Mick Jagger, they’d make a grown man cry.

Now, “Dollar General” is a misnomer: the company does not sell “everything for a dollar.” Rather, it sells a mix of general merchandise and basic apparel that a lower-income family would need. I do not derogate DG’s customer base—the company’s self-described mission is to serve “the basic consumable needs of customers primarily in the low and middle-income brackets and those on fixed incomes.”

And the company isn’t kidding: its customers have an average annual income of $30,000; a quarter of them earn less than $20,000 annually. Most items in the store cost $10 or less; a third cost a buck or less. And the average ticket per shopper is nine bucks.

Despite longstanding fears of Wal-Mart’s dominance of the lower-income customer in DG’s territory, the company grew and thrived, with a good return on capital, a 20%+ return on equity and years of sales growth.

Turned out, some of the good numbers owed themselves to flakey accounting rather than great management, which revelation and subsequent SEC investigation knocked the stock off analyst “Buy” lists a few years ago. Nevertheless, the scandal triggered a change at the top much anticipated by investors eager to buy a growth stock on the cheap, assuming the 'store environment enhancements' would have the desired effect.

The results under new management have, so far, been mixed. Sales growth has slowed and recently net margins have been chopped nearly in half. For all the share buybacks and new initiatives, the stock has languished and Wall Street by and large is on the sidelines, except the aforementioned, buy-reiterating, bull.

Which brings me back to my recent tour of Dollar General—and other—stores in the south.

I can’t say it was scientific, being a random collection of stores in random small towns in random areas of Mississippi and Tennessee. And I certainly wouldn’t make an investment decision on the basis of a small sampling of a few stores.

But after seeing the same old 'enhanced' Dollar General stores with the same old stuff in the same old displays and on the same old shelves, what came to mind—particularly as I skipped the last store because a sorry array of rickety tables had been set up in the parking lot piled high with sale items—was Tom Joad’s truck loaded with his family's every earthly belonging, in the Grapes of Wrath.

As poor Tom once said, “Sure don’t look none too prosperous.”

Jeff Matthews
I Am Not Making This Up

© 2006 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.


Robert ben Klilne said...

Dollar General is the department store of Pahokee, Florida. It is just about the only retail there!

127030761 said...

What displays? From my one shopping
experience, I would compare the store to a junk closet with new stuff.

Sam E Antar said...

Your specific comment:
I will wager the analyst in question and her one or two other fellow Dollar General bulls on the Street have not seen the half a dozen stores I recently viewed in the heart of Dollar General Territory.

My comment:
As the former Crazy Eddie CFO I find your comment indicative that nothing has changed regarding the depth of knowledge of Wall Street analysts since I helped commit one of the largest securities frauds in the 1980's.

In my time I found most of them too willing to believe our spin regarding the company. Very few did any in-depth research beyond reading financial statements (they did not do much good in their analysis).

Worst yet, their research were often relied upon by the investment banking divisions vying for our business.

When the company used public offerings to raise capital, sell stock for insiders, and raise debt we found that the Wall Street due diligence process was superficial as they ignored many "red flags."

Brent Voss said...

I've done a bit of Dollar General store due diligence myself. My findings indicate a wide divergence in store quality. The urban stores are often cluttered, messy and understaffed. The more rural, small-town locations are clean and well staffed. The reason the rural locations are so much better is that the Dollar General store is often the only discount shopping option in town. There is more pride in the small-town stores.
Due to a couple of quarterly expectation misses, Wall Street has turned overly pessimistic on this equity. There is more value in those small stores than today's quotation represents. Significant value exists in DG's low-cost, niche-market distribution system.

Texas said...

I have visited a few stores in the Little Rock area and found many clean stores with unexpected closeouts and values. We found an 8oz Baby Magic sun screen for only $2.00, many great DVDs priced @ 2 for $10.00, and 2 pack Revlon nail polish for only $1.00. If the new management is focused on closeouts with these great prices, I will continue to shop at my local Dollar General.