Dollar General Still Fails to Show Me a Dollar
My firm owned Dollar General for some time. We have been a believer in DG's strategy. I was very public about my conviction on the validity of DG's strategy. Though the company sounded very good and very confident in what they were doing, their actions and the execution of the road map lacked. After they reported sub par operating results in the first quarter 2004, I put DG on my probation list. In the second quarter 2004 performance did not improve, in fact it only got worse.
Oscillating markets are not as forgiving as bull markets, thus as my partner Michael Conn says: "investor has to put stocks on a shorter leash". On the second strike we sold Dollar General. As it always happens, the stock did not care that we sold it. S&P upgraded the stock, and the stock actually trended up. S&P cited improved fundamentals in their upgrade and I just couldn't figure out if they were looking at the same company I was looking at.
Looking through today's numbers the same concerns that I had six months ago suddenly surfaced in the stock. Both operating and gross margins declined, though sales growth was fairly good, inventories grew almost 2% faster than sales. This may not sound like a big deal, but it is. DG spent an enormous amount of money on new, 'more efficient' inventory systems, thus one would expect than inventory turnover would increase; that has not happened. For a company that has the ambitions to open 10% of new stores a year, a decrease in inventory turnover could be fatal, as it consumes a lot of cash.
I am sure management has another excuse why things did not go their way, but in this market investors may want to be looking for a replacement (not advice).
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