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No. of Recommendations: 6
kinda a random post - just trying to solicit different ways of thinking

DG is a simple story - open stores, improve margins, buy shares, rinse and repeat

1 - i read the call - they are adding self-checkouts which is good and then experimenting with fresh foods which could be good but it will jack up SGA beyond a 2.5% to 3% leverage point.

2 - The forecast, which is prob reliable, is:

Year – sales up 7% for year; 2.5% SSS; 4-6% operating profit growth; 6.30-6.50; 22-22.5% tax rate; 1b buybacks; 775-825 CapEx
Plans for 2075 projects, with 975 new stores, 1000 remodels, 100 relocations
Stock is $117 now, so 2019 PE would be 18x


3 - EPS ended 2018 at $5.97. we are looking at one year EPS growth of 8% and that doesn't strike me as overly exciting. in theory, there will be a payback for this in a couple years but DG's explanation for the nice 4% comp in Q4 was they wanted to promotional to take advantage of chaos (my take), which is pretty sketchy; if you get promotional, often times it is cause you have to, and that's never a good thing

4 - the stock has traded FAR lower than this in the very recent past, so the TTM valuation at 19x doesn't seem that interesting (CFFO of 2144; CapEx 734; EV is 33b; this isn't a software company where they keep the CFFO)

5 - my debate is a simple one - i have a dink, and i think I should exit my position. I think this because the stock is near a high, the valuation doesn't strike me as compelling, and I've seen this trade far lower in the past. Do I like the business? Yes, I like the business, and there was an analyst who recently said that the SGA spend was what good companies do - they spend now to make better returns in the future, but it is also possible that this is a spend now to stay in place cause we have to spend now, and by definition DG is a real business that doesn't get to play with numbers and you don't usually get valuation spikes. When DG came out with their muted forecast, the stock fell 10 points, but it has now mostly recovered - which frankly I find surprising cause I think it should have fallen on the forecast. Yet, we are in a happy market - I've seen this in other stocks which are moving higher despite poor financial results - rising tide and all that.

6 -there are a number of ways to frame this but I would be interested in how others view the framing/valuation questions, particularly with a simple story like this one. What I'm interested in is how you approach a position where there is no clear cut decision that strikes you as overly right or overly wrong.

7 - I wouldn't add here.

any thoughts appreciated
don't even have to relate to this story
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