Dollar General (NYSE: DG) has become an investor favorite in recent years because of its growth and apparent immunity to the retail apocalypse.
Like its’ archrival Dollar Tree (NASDAQ: DLTR) has been growing like a weed in the past few years. It operated 13,320 stores and 15 distribution centers that employed more than 120,000 people on February 3, 2017. The company opened around 900 stores last year and is planning to open another 1,000 this year.
The growth has paid off in the form of increased revenue and income. Dollar General’s revenues increased by $1.61 billion during the 12 months that ended on April 30, 2017; it reported $20.72 billion in revenues in April 2016 and $22.33 billion a year later. That gave Dollar General a net income of $1.235 billion on April 30, 2017, up slightly from $1.207 billion the year before.
To add icing to the cake, Mr. Market likes Dollar General a lot; its’ shares were trading at $75.36 on June 13, 2017. Those investors enjoyed a return on equity of 22.80% on April 30, and will appreciate a dividend of 26¢ on July 7, 2017.
Despite all that Dollar General might not be a good long term investment because there are some serious threats to its future out there.
Ten Serious Threats to Dollar General
- Amazon (NASDAQ: AMZN) – The conventional wisdom is that Dollar General is “Amazon Proof,” but conventional wisdom is often dead wrong about the Everything Store. One of Dollar General’s core businesses is family needs such as cleaning supplies, laundry detergent, toiletries and housewares. Amazon is making a strong push into this area with its Household Essentials. An even greater problem is that Amazon is even more convenient than Dollar General. One of Dollar General’s greatest advantages is its convenience. Amazon beats that because it always you to shop without leaving home. The menace is magnified by Amazon Dash which lets customers order merchandise at the touch of a button. Despite what some people say, Amazon is in a position to steal a lot of DG’s business. The Federal Trade Commission
- Walmart (NSYE: WMT) and Walmart.com – Walmart has demonstrated an almost incredible ability to undercut everybody’s prices including Dollar General’s. To magnify the threat Walmart has been able to match some of Amazon’s ecommerce capabilities. It now offers free two day shipping on purchases of over $35 and prices on Walmart.com are often the lowest around. Walmart is now experimenting with a wide variety of delivery options and with next generation technologies including blockhain and payment apps.
- Kroger (NYSE: KR) – The supermarket giant has transformed itself into a deep discounter with prices that often undercut dollar stores. Many of its stores offer a wide variety of stuff dollar stores cannot including gasoline, diesel fuel, prescriptions, hot food, takeout food and coffee shops. A real danger to Dollar General from Kroger is its rewards card program that gives people 10¢ off a gallon of gas or diesel fuel for every $100 they spend at supermarkets like Ralph’s and King Soopers. A longer term menace is Kroger’s fast growing delivery capabilities; which offer another shopping experience that’s more convenient than Dollar General.
- Aldi – The privately held German discount grocery giant is planning to spend $3.4 billion to increase its US footprint to 2,500 stores by 2022, CNBC reported. The money will be spent on 900 stores and a $1.6 billion remodel to 1,300 existing locations. Aldi threatens Dollar General by offering lower prices on high quality items through its private label brands. Its Chief Executive Jason Hart wants Aldi to have prices that are 21% lower than competitors. Aldi is a major menace to Dollar General because it operates in the same small town and rustbelt markets. It also has an almost cult-like following among cheapskates that will be hard to overcome.
- Oversaturation of the dollar stores – America might simply have too many dollar stores. Statista forecasts that there will be 34,261 small box discount stores in the United States by 2020. Those numbers will include around 15,000 Dollar Generals and 14,000 Dollar Trees and 2,500 Aldis. Not to mention an undetermined number of stores planned by Aldi’s archrival Lidl. To sustain sales operators will have to mindlessly cut prices at some point prices might get too low to cover operating expenses leading to the death spiral. This actually happened to the third major dollar store operator Family Dollar a few years back. It went into the death spiral after a period of rapid expansion, started closing stores and was eventually bought by Dollar Tree.
- Deflation – 2016 was marked by deflation in a number of areas including Food and oil a trend that seems to be continuing. Food prices fell by more than 2% for five straight months between September 2016 and January 2017 USDA data uncovered by Bloomberg indicates. Such deflation is bad news for discounters because it eliminates their advantage of low prices. Deflation makes it harder to profit from the loss leader strategy because higher prices on some products don’t make up for losses on bargains. A prolonged period of deflation will lower the profit margin and force discounters to make tough decisions like discontinuing certain products.
- Income Inequality – For the past few years income inequality has benefited Dollar General by giving cash-strapped consumers more incentive to shop at discounters. Yet now it is a threat to Dollar General because the upper class is growing while the incomes of those most likely to shop at dollar stores are shrinking. The incomes of high school graduates without a college degree shrank by 21.9% between 1971 and 2015, Pew Social Trends calculated. The same study estimated that 49% of the wealth in the United States is going to upper income households, meaning that Dollar General’s customers simply lack the money to shop. That leaves Dollar General vulnerable to cuts in food stamps like those proposed by President Trump.
- Labor Costs – Much of Dollar General’s success has been in its ability to pay very low wages. That might change, a move to raise the minimum wage to $15 is sweeping the nation. There’s also a growing employment, one reason why Dollar General was able to expand was all the people thrown out of work by the economic meltdown of 2008 who were desperate enough to take any job. Now there’s plenty of other work out there which will force Dollar General to offer higher pay to keep the register running and the shelves stocked. Dollar stores are already desperate for help, Family Dollar has help wanted notices posted on its front door; and I saw a sign at Dollar Tree offering a cash reward to anybody who would direct a qualified management candidate to the store.
- Walgreens Boots Alliance (NASDAQ: WBA) – The nation’s largest drugstore chain currently operates 8,175 small box stores. It’s been trying to buying competitor Rite Aid (NYSE: RAD) which operates around 4,553 stores. If that deals goes through and Walgreen and Rite Aid sell around 1,000 stores to comply with the Federal Trade Commission, the company will have a US footprint rivaling Dollar Generals; around 12,000 stores. That will give Walgreen the leverage to engage in the kind of deep discounting that Walmart does through convenient neighborhood locations.
- The Federal Trade Commission – The FTC has tolerated Dollar General’s growth but for how much longer? The company’s massive footprint and dominance in some small town markets is likely to lead to antitrust charges. All it would take is one aggressive Congressperson or Senator on an anti-dollar store witch hunt to spur federal action. Since Dollar General is unpopular and widely blamed for harming mom and pop stores it would make a convenient political target.
Dollar General has done surprisingly well but its position is far more vulnerable than is widely believed. Be very careful with this stock because the company can collapse at any time.