Dollar General used to be one of the best stocks in the market but over the last 2 years shares have collapsed by 68% the question is whether the stock is now a value play or a value trap at the latest price Dollar General now has a market cap of 17.6 billion with a significant chunk of debt the Enterprise Value is 23.4 billion Revenue over the past 12 months comes to 40 billion with 1.4 billion of net income and 1.7 billion of free cash flow so the stock is valued at under 13 times earnings and 14 times free cash flow that valuation certainly looks cheap not long ago.
Dollar General had a PE ratio over 25 and a market cap over 50 billion however Dollar General's results keep getting worse in the most recent quarter same store sales increased by only half a percent gross margins fell 1.1% operating profit decreased 21% and net income fell 20% in response Dollar General has replaced its CEO halted share BuyBacks and implemented a turnaround strategy called Back to Basics the scheme involves reducing the number of products in store bringing back staff checkouts improving supply chain and renovating existing shops.
All in the company expects to open 730 new stores this year remodel 1,600 and relocate 85 at some point these changes should bring an improvement to Dollar General's results and there's an argument that reent performance is partly down to external forces with almost 20,000 stores spread across the US.
Dollar General management has excellent visibility on the health of the consumer management said that weakness has occurred across all of its regions and that means poor results must be partly due to economic factors however there's also a case that Dollar General is simply facing too much competition dollar stores have proliferated in recent years partly.
In response to Dollar General success Walmart and Amazon continue to get stronger and as online deliveries get faster cheaper and more widespread there's less need for consumers to visit stores at all taking a longer view you can see that Dollar General's operating margins have been trending down for some time there was a blip during the pandemic but Revenue growth has also slowed significantly it's a similar story with free cash flow margins which have fallen and now average 4.6% so let's assume Dollar General grows Revenue at 5% a year for the next 10 years with 4.5% free cash flow margins and let's assume the company reinstates its buyback scheme to support the buyback of 2% of outstanding shares per year under those assumptions and using a discount rate of 10% a simple discounted cash flow model produces an estimated annualized return of about 9.2% that's not an unreasonable forecast and Dollar General stock May well experience a bounce from improving results there's a good chance of a turnaround here but investors need to consider the longer term trends and whether this company will be truly thriving in 10 years time.
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