If you have ever driven across the United States, there is one retail store in almost every town, large or small, and that’s Dollar General Corporation (NYSE: DG). The company operates over 17,000 stores across 46 states, offering a wide range of merchandise at affordable prices. Dollar General’s mission is to provide convenience and value to its customers by offering a selection of everyday essentials and household products.
The company caters to a value-conscious customer, and with inflation still trending at the 4% level, the business would appear to be able to maintain its current strength as it looks to expand into urban areas and underserved communities.
While all certainly seems in good shape for the company, some storm clouds could be on the horizon. With a recent major upheaval at the organization’s top and the potential for ongoing inflation to remain in place, it may be time to look for greener pastures.
Here are 6 top reasons to avoid Dollar General stock today.
The Chief Executive Officer (CEO) was asked to resign recently
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The former CEO, Jeff Owen, was asked to leave this year after less than a year on the job, and former CEO Todd Vasos returned to the C suite. Mr. Vasos was initially CEO from June 2015 to November 2022 before moving to an advisory position and retiring. Wall Street is not a fan of disarray at the top and will be watching closely as Mr. Vasos returns.
Dollar General had posted dreadful results until the third quarter.
The company has missed Wall Street profit projections in four past quarters, and shares have fallen nearly 50% this year. While removing the former CEO is a start for the company, the reality is that getting back into the form that made the stock a gem for growth stock investors may take months or even years. Fortunately, third-quarter results saw a bounceback. Dollar General reported a net income of $526.2 million for the third quarter of 2022, an increase of 8.0% compared to $487.0 million in the third quarter of 2022.
Lots of competition that may continue to grow
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While Dollar General is the only game in town in many smaller communities, competing in larger markets is more complex. With popular discount retailers like The TJX Companies, Inc. (NYSE: TJX) and Ross Stores, Inc. (NASDAQ: ROST) expanding their presence and grocery stores adding more and more products in addition to food and beverages, taking market share in more prominent communities will remain extremely difficult.
Labor issues have been a problem in the past.
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According to reports from the Associated Press, back in the summer, a National Labor Relations Board judge said that Dollar General violated federal labor law and “clearly intended to interfere” with worker rights in efforts to quell unionization at a Connecticut store.
According to the labor board decision, violations from the Dolgen Corp., which operates Dollar General stores, included wrongfully terminating an employee and making an implied threat to close the location in Barkhamsted. In addition, the company also sent corporate officials to the store and other sites across Connecticut in response to a 2021 union drive.
Store safety has been a concern.
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The company has faced penalties for store safety issues, including federal citations for electrical hazards and wiring issues. It reportedly concerns obstructed fire exits.
The direct competition is starting to weaken some, but maybe a better buy
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While Dollar General’s third-quarter print was better, Dollar Tree, Inc. (NASDAQ: DLTR) reported third-quarter same-store net sales that increased 5.4%, partly driven by a 7% increase in in-store traffic. However, the stock has fared much better and is only down 15% from the 52-week high.
Lastly
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The price-to-earnings multiple has tumbled to 13.20 from 25, as the stock was crushed this year. Many value investors would likely sniff around the stock at current levels, but many across Wall Street call it the ultimate value trap. Plus, with Wall Street consensus price target estimates at $132.33 and the stock trading near $130, there appears to be little upside.
While the stock has bounced some as the former CEO returns, that bounce may be short-lived as estimates have been lowered, comps are still expected to be flat to negative, and inflation continues to batter the company’s core customer. It makes sense to avoid the shares now.
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