Dollar General (DG)

DG reported disappointing quarterly results overnight and is down by almost 17% in pre-market trading. Two things:

–it will be interesting to see how the stock fares once the market is open. I read the sharp drop as bots being more aggressive and lack of buy-and-hold participation in the aftermarket. I have no real thoughts on how trading will go, just that a bounceback would be evidence that trading against bots may not be as foolish as might seem …and the lack of one, or a further decline, will be equally instructuve

–I see the pecking order of traditional retail, moving from the most affluent customer base to the least, as:

luxury goods

department stores (maybe an anachronism)

Target (TGT)

Walmart (WMT)

dollar stores.

In good times, customers shift upmarket from where they usually shop. In bad times, they shift down.

As I read the DG news, the company is facing two issues: it has too much inventory (a la TGT) and customers who shifted down during the pandemic are beginning to return back up. It may well be able to keep some of this higher-end traffic and this long-term plus is being obscured by the inventory issue. Still, the message for the economy is that buyers are giving an all-clear signal. The chief beneficiary should be WMT.

WMT, in turn, will be hoping to keep customers who have shifted down from TGT.

If I were still an institutional portfolio manager, and if I were interested in US mainstream retail (which, I think, we all should be) I would have a more-or-less permanent position that would consist of TGT + WMT. In a good economy, I’d be much heavier in TGT; in a bad economy, I’d be heavier in WMT, with maybe a smaller position in dollar stores. Right now, I’d be shifting out of my more defensive, WMT-heavy stance.

As an individual investor, I’m much more interested in IT than retail. I’ve had a substantial position in TGT for years. It has been a bad mistake over the past year not to have shifted into WMT. But I find myself just starting to add to TGT again.

Another thought: I think there’s a big question mark over luxury retail. A significant chunk of this sector’s revenues (20%?) and a larger part of profits (1/3?) come from China. Not a good place to be right now, and potentially a source of negative earnings surprise over the coming few quarters. Another potential plus for other retail stocks.

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