The retail sector is renowned for its ruthlessness, and rightly so. It's not unusual to see well-established, fashionable brands with a bright future suddenly become pariahs at the mercy of the public.
Turnarounds are extremely rare, and agonies can be long and painful. Whatever the segment, it's hard to find out-of-fashion brands that manage to make a comeback.
Could Dollar General be one of them? In its hyper-competitive "hard discount" segment, the group had until then distinguished itself by its outstanding management. This was evidenced, among other things, by a quadrupling of earnings per share over the decade 2013-2023.
Throughout this period, the market ping-ponged between a low of fifteen times earnings and a high of thirty times earnings. These swings reflected recognition of a remarkable performance on the one hand, and fears that the Group had exhausted its growth potential on the other.
This floor has recently been broken, with the valuation now reaching fourteen times next year's expected earnings, and twelve times those of the following year. Is this a temporary worry, or is Dollar General facing an age-old tide against which all efforts to swim against the tide will be in vain?
It's clear that Amazon now covers almost the entire US territory, while Walmart has proved in recent years that it is prepared to give up a few points of gross margin to consolidate its position. to give up a few percentage points of gross margin to consolidate its market share, without its profits suffering unduly; and, to make matters worse, the formidable Chinese competition from Temu and others is gradually making its presence felt.
At the same time, rising interest rates are increasing the cost of debt, while inflation is having a similar effect on wages and rental costs. Of course, Dollar General's customers are not immune to these economic conditions. General Manager Todd Vases reminded us that 60% of Dollar General customers belong to households earning less than $35,000 a year.