Dollar General stock decline a ‘great buying opportunity,’ analyst says
Loop Capital Managing Director Anthony Chukumba joins Yahoo Finance Live to discuss Dollar General earnings and the subsequent stock move as well as the outlook for BJ's Wholesale.
Video Transcript
- Dollar General taking a steep fall today in the session. Down more than 8% after the discount retailer reported an earnings miss and lowered its guidance for the year. Joining me now to discuss, the Loop Capital Managing Director Anthony Chukumba. Anthony, it's never a good thing when you miss and you lower your forecasts but an 8% decline, you think that's justified?
ANTHONY CHUKUMBA: I think that it's overdone quite frankly. Now to be clear, it's rare to see Dollar General not only miss consensus expectations but also guide lower for the upcoming quarter. And we clearly saw that here. So I certainly understand the stock being down. But when you really start to peel the onion, a lot of this is based on temporary factors. And thus, I believe that this is a great buying opportunity.
- So when do you expect things to turn around? Because you said this will be a temporary, a temporary blip right now.
ANTHONY CHUKUMBA: Yeah. So it sounds like a lot of this had to do with some incremental costs related to supply chain. They had some temporary distribution centers that they didn't stand up quite as quickly as they were expecting. That alone was a $40 million pre-tax hit to the third quarter results. That equates to about $0.14 a share. So that's like 2/3 of the consensus expectations. That will continue to be a drag in the fourth quarter but it looks like a lot of those temporary supply chain costs will dissipate by the first quarter of next year. So temporary blip, a couple of quarters doesn't change the long term story at all.
- Well Anthony, a lot of people looking at this and saying, well certainly Dollar General not the only one. We saw Dollar Tree also with some disappointing results. But yet, you think about the environment right now that we're operating in. We hear so much about retailers talking about consumers trading down. To what extent can we expect a tailwind on the back of that for Dollar General?
ANTHONY CHUKUMBA: We're already seeing that. I mean, Comp store sales are up 7% this quarter. They guided to Comp store sales being up 6% to 7% in the fourth quarter. So clearly, they are seeing that trade down from higher priced supermarkets, drugstores, convenience stores. Quite frankly, I think there's probably been some trade down happening from Walmart and Target as well.
It's not that they have lower prices than Walmart and Target but they do have lower prices than the supermarkets. Trucks is going to be in stores. But it's more that in tough economic times, you're going to see consumers making more frequent shopping trips, smaller shopping trips closer to need. And in that scenario, you're much more likely to go to Dollar General or a Family Dollar as opposed to trudging all the way up to the Target or the Walmart.
So from a top line perspective, the results were very, very strong as was the guidance for the fourth quarter. It's really more like I said those temporary supply chain headwinds.
- And I know that you also have BJ's Wholesale Club as a favorite as well. How does that play into the picture when you compare it to some of these dollar stores?
ANTHONY CHUKUMBA: Well to be clear, I don't cover BJ's Wholesale. One of my colleagues does but she is very positive. And it's a very similar theme. I mean, BJ's is going to target a higher income consumer relative to Dollar General or a Family Dollar for that matter. But it's still the same type of thing where in these tough economic times, it makes a lot more sense to go to a BJ's or even a Costco for that matter where you know you're going to save a lot of money relative to the places that you normally shop. So it's a very similar theme.
