Is Dollar General’s Growth Sustainable?

Dollar General’s (NYSE: DG) earnings report raises just one question in my mind: is this company’s growth sustainable? I’ve long questioned the dollar store bubble and DG only reinforces my suspicions.

Dollar General’s revenues grew by $1.62 billion in 2016, rising from $20.37 billion in January 2016 to $21.99 billion in January 2017. That’s a pretty impressive accomplishment in a discount environment where such mainstays as Target (NYSE: TGT) are suffering substantial revenue losses.

Target’s revenues fell by $4.41 billion in 2016, dropping from $73.78 billion in January 2016 to $69.5 billion a year later. That will undoubtedly lead some dollar store bulls to claim that chains like DG are taking revenue from Target.

Is Dollar General’s Business Model Sustainable?

Despite that there are more than a few cracks appearing in Dollar General’s empire. The company is adding 1,000 more stores this year in addition the 13,000 it already operates.

The trouble there is CEO Todd Vasos has admitted that Dollar General is not capable of properly managing the stores it already has. He did that by committing to increasing employee and the training budget by $2.7 billion, CNBC reported. At the same the company prices on hundreds of items at 17% of its stores, a sure admission of falling sales.

One has to wonder how DG is going to pay for the additional training and pay raises, if it takes in less money from sales. If that was not enough, Dollar General is also experimenting with such expensive additions as fresh produce in its stores.

Is Dollar General Losing the Discount Wars?

That sounds like an admission that Dollar General is having trouble competing with Aldi and Kroger (NYSE: KR) which has successfully undercut dollar-store prices in some categories. It also sounds as if Dollar General is having trouble competing with Amazon and other online retailers. Perhaps the only way it can compete with their convenience is by greatly reducing its prices.

Dollar stores’ greatest selling point is their convenience, small neighborhood locations vs the big box. Well, Amazon (NASDAQ: AMZN) is even more convenient it allows you to shop without leaving home.

Oh and if all that spending was not enough, DG is planning big investments in digital another big-ticket item. That’s another admission by Vassos that his chain cannot compete with Amazon.

Can Dollar General Afford these Changes?

Cynical observers will wonder if Dollar General can afford these potentially expensive initiatives. After all it reported a free cash flow of just $326.23 million on January 31, 2017.

The discounter also generates very little float, it reported cash and short-term investments of just $187.92 million on January 31, 2017; despite $1.605 billion in cash from operations. Then there were its assets of $11.67 billion which sounds pretty pathetic for a chain that supposedly has 13,000 stores. If these numbers are accurate Dollar General might run out of money fairly quickly even though it reported a net income of $1.251 billion on January 31.

There are also some questionable figures in Dollar General’s earnings report including a profit of margin of 6.89%. If the profit margin is that high, one has to wonder why the free cash flow is so low?

 Could Dollar General Collapse?

These numbers point to a potential catastrophe at Dollar General, it might run out of money and collapse. This might occur because all the company’s money is being reinvested in mindless expansion, when the expansion reaches its limits, the money runs out and collapse ensues.

A major cause of this would be that all Dollar General’s momentum is coming come from expansion. All the energy and money is wrapped up in expansion, the expansion ends and the company’s motivation vanishes.

An even greater problem might be all that Dollar General’s money is being spent on expansion. That’s creating serious problems at the chain including poor management and turnover.

Serious Problems at Dollar General

It has led to some ugly scandals including a store in Cincinnati that was closed after health inspectors found rodents and insects on the premises. Dollar General management only become aware of the problem after the media contacted them, which is pretty pathetic.

“Observed the presence of live insects, rodents, and other pests,” a health inspector’s report obtained by WLWT TV indicates. “Observed large amount of mice feces and nesting material in facility…Observed a build-up of dirt and debris. Observed a large amount of rodent feces throughout the facility on the fall, on and under shelves, including non-food areas.”

“During the inspection, we actually observed animal feces on shelves throughout the store,” George Kesterman  of the Hamilton County Health Department told WLWT. “We also observed it on top of closed food packages and at least one package had been chewed open.”

One has to wonder how many other Dollar General stores have such problems. Generally, such troubles are a companywide problem. In light of this, Vasso’s increased pay and training sounds like too little too late.

Perhaps Dollar General should stop the expansion and concentrate on the basics. The debacle in Cincinnati sure sounds like a store without effective management, and it might be far from alone.

Dollar General’s Amazon and Millennial Problems

Finally there’s Dollar General’s millennial problem which Vassos is trying to address with digital spending. The millennial (and Generation X) problem is a fairly simple one: those younger consumers are shopping online at Amazon (NASDAQ: AMZN) and not at brick and mortar stores.

Amazon in particular is becoming a direct competitor to dollar stores like DG by selling increasing amounts of cleaning supplies, food and household essentials. It also offers a far more convenient shopping experience (home sitting on the couch vs. pushing a cart around Dollar General).

It is hard to see how Dollar General would be able to compete with Amazon or any online retailer. Even if the chain creates a spiffy new app and fancy website, DG is still a dollar store. It cannot ship stuff directly to customers like Amazon which might be its eventual downfall.

Is Dollar General a Good Investment?

All this indicates that Dollar General would not be a good long term investment even though it rewarded shareholders with a 23.21% return on equity on January 31, 2017.

One reason why I think DG is a poor investment is that it is overpriced at $68.57 a share on March 28, 2017. There’s nothing in its earnings report and business to justify that price. Nor does the company seem to have the resources to keep paying the 26¢ dividend scheduled for April 7.

My advice is to sell Dollar General now, because its business model is not sustainable. This dollar store operator is headed up for a crackup and an implosion.