Is Dollar General (DG) the most dangerous stock in America?

There is one stock that scares me in today’s markets: Dollar General (DG). I think the bottom-feeding dollar-store operator is bubbling.

In 2020, Dollar General’s share price has shot up from $156.54 on 2 January to $203 on 2 September 2020 and fell to $195.72 on 4 September 2020. I cannot see how Dollar General (NYSE: DG) is worth $203 or $195.72 a share, but Mr. Market loves this stock.

To be fair, some of Dollar General’s financial numbers look great. For instance, Dollar reported a 24.38% revenue growth rate for the quarter ending on 31 July 2020. In addition, Dollar General reported a quarterly operating income of $1.043 billion and a gross profit of $2.818 billion on 31 July 2020.

Dollar General profits from coronavirus

Hence, Dollar General is growing, but I think the Coronavirus Depression drives DG’s growth. To explain, Americans have less money to shop so they head to the cheapest place possible – Dollar General or its competitors, Aldi, Dollar Tree (NASDAQ: DLTR), and Walmart (NYSE: WMT).  

Dollar General has enormous numbers of new customers, including the 55 million Americans who have filed for unemployment since March 2020. Thus, Dollar General bases its success on ordinary Americans’ misery.

Dollar General has long built stores in dying small towns with no competitors. Now, Dollar General can expand into suburbia and urban areas. In fact, Dollar General is undertaking an aggressive expansion.

Dollar General opened 500 new stores, remodeled 973 stores, and moved 43 locations in the first half of 2020, Supermarket News claims. In addition, Dollar General is adding over 50,000 coolers to sell fresh and frozen food in 2020, DG Chief Operating Officer Jeffrey Owen claims. Furthermore, Dollar General hopes to open 1,000 new stores in 2020.

Why Dollar General Could Collapse

I think Dollar General (NYSE: DG) could collapse because it may not be making enough money to support its operations.

For example, Dollar General claimed to operate 16,720 stores in 46 states in August 2020. Conversely, Dollar General reported $8.684 billion in quarterly revenues on 31 July 2020.

Moreover, Dollar General had only $2.959 billion in cash and short-term investments and total assets of $25.847 billion on 31 July 2020. In addition, Dollar General reported a quarterly net income of $768 million, and a quarterly ending cash flow of $285.69 million on the same day.

Notably, Dollar General’s quarterly operating income fell slightly, from $1.736 billion on 30 April 2020 to $1.171 billion on 31 July 2020. Moreover, Dollar General’s quarterly ending cash flow fell from $2.673 billion on 30 April 2020 to $285.69 million on 31 July 2020.

Dollar General is not Sustainable

Given these numbers, I do not think Dollar General has the cash to sustain its operations with massive revenue growth. Unfortunately, I think the Coronavirus Depression is the only thing driving revenue growth at DG.

Hence, if the Coronavirus Depression ends fast, Dollar General could collapse fast. Remember, the only reason why people are shopping at Dollar General is that job loss limits their buying capacity.

On the other hand, I do not think the Coronavirus Depression will end until 2022 at the earliest. To elaborate, most disease experts the pandemic will continue until November 2021. Hence, Dollar General could experience another two years of sales growth.

How Amazon threatens Dollar General

Unfortunately, Dollar General will face aggressive competition from Walmart (NYSE: WMT) and Amazon (NASDAQ: AMZN) in those years.

Amazon, in particular, is a major threat to Dollar General because it can undercut DG’s prices and offer free shipping. Hence, customers need not shop at Dollar General, which can be an unpleasant experience. Instead, Amazon Prime will deliver the cheap stuff to the customer’s door.

The ability to have cheap merchandise delivered to your home will be an important attribute for class-conscious Americans. For example, the broke soccer mom does not have to worry that the neighbors will see her car in the Dollar General parking lot. Instead, that woman still has a pile of Amazon boxes on her doorstep to signal her middle-class status even if she is on unemployment.

A major menace to Dollar General is Amazon’s efforts to market to the poor. Amazon already markets to the poor, Amazon gift cards are for sale for cash at most dollar stores.

Are Dollar Stores a Bubble?

I think dollar stores could be in a bubble that is heading for collapse. Besides Dollar General (DG), Dollar Tree (DLTR) operates 15,479 stores in the United States.

Moreover, Supermarket News claims, Dollar Tree has opened 131 new stores in 2020. In addition, German discount grocer Aldi operates over 2,000 stores in the United States.

Thus, dollar stores are expanding aggressively in the face of economic collapse. Frighteningly, we have seen this scenario before and it in ended in catastrophe.

A decade ago, Family Dollar expanded to 7,000 stores in 44 states. In fact, Family Dollar opened 500 new stores in 2013, five years after the economic meltdown of 2007-2008. In 2014, Family Dollar ran out of money and began to collapse. Facing total collapse, Family Dollar’s management sold out to Dollar Tree (DLTR) in July 2014.

Why You Need to fear Dollar General

I have to wonder who would buy Dollar General (DG) or Dollar Tree if they collapse.

What happens to all the small towns where Dollar General; or Family Dollar (now a Dollar Tree subsidiary), is the only general merchandise retailer or worse the only grocery store? Will those communities become unlivable, or dependent on Amazon (AMZN) for everything?

Investors need to watch dollar stores because these small box retailers are a measure of the economic health of small town America. Frighteningly dollar stores could now be an indicator of the economic health of urban and suburban America too.

In the final analysis, I consider Dollar General (DG) a terrible stock despite the 36₵ dividend it will pay on 20 October 2020. I think Dollar General is a horrible stock because it’s overpriced, has little cash, and no margin of safety. I advise investors to stay away from Dollar General because I think it will collapse.