Key insights
- The author argues that Dollar General is undervalued at a P/E of 17x due to market misinterpretation of the CEO transition and strategic shift towards grocery and digital loyalty. They draw a parallel to Delta's successful post-COVID strategy, suggesting DG's moves will improve margins and attract higher-income customers amid a favorable macroeconomic backdrop. This could lead to a re-rating of the stock.
DG dropped 5% last Tuesday when they announced JJ Fleeman (35+ years in grocery) as Todd Vasos's successor, starting January 2027. Stock is sitting around $117. ATH was $244 in October 2022. Current PE is roughly 17x.
For a company that just posted same-store sales up 4.3% (fastest pace in yrs) operating profit +106%, and $3.6B in annual operating cash flow, that multiple looks like the market is pricing a story that the financials aren't telling.
I know this is retail but I feel like this is similar (but opposite, I know lol) to the pattern we've seen in the Airlines space. Post covid while Delta and United were positioning for premium travel, AA was stuck improving operations.
2025 profits: Delta $5B, United $3.4B, AA $111M on $54.6B. In 2022 United was at $48 ($88 today), Delta was at $40 ($64 today) and AA was at $18 ($10 today).
DG at $117 on a 17x PE feels like its being priced like AA was. DG's current moves, including the Fleeman hire, read like they are moving like Delta did. Pivoting to lean more into grocery expertise, digital loyalty infrastructure, fresh food margin architecture, etc. DG Fresh has been around for years and they've incorporated produce so this was years in the making. It's also a play to help margins. Fleeman has omnichannel and loyalty program exp.
The macro setup is perfect. Every current headwind (tariffs, layoffs, rising gas prices, market uncertainty) expands DG's market upward. Their core customer was already there. The higher income household trading down is arriving. Management called out growth across all income brackets in most recent quarter, including higher income households. Showing up in traffic and basket size already.
Dollar Tree and Family Dollar aren't making execution mistakes. They made category errors. They broke their price architecture and absorbed a distressed acquisition. DG never had that structural problem.
But honestly, I don't shop at Dollar General and don't have one near me. I like to have a better feel for companies like this before I get involved. Anyone have any ground level info on it or any other market info I'm not considering?