When is a 17% markdown in a stock not a bargain? When it's the stock of a dollar store.
Yesterday's butchering of the dollar stores came about in a way that was so unfathomable to the unsuspecting analysts, so confusing, in such disarray, that you have to wonder if everyone who follows the company -- and its colleague Dollar Tree (DLTR) -- simply didn't get the memo.
The memo being the 10% price reductions on average for 450 of the best-selling items at Dollar General (DG) . The menu being the incredible new price competition from Walmart (WMT) . The memo being the price deflation that's hitting all the supermarkets.
The memo about the 500,000 people who lost food stamp eligibility from the federal government.
The memo that says while the poorer people aren't doing that much better, the ones who are have started shopping at "nicer" places again.
The wholesale "wronged-ness" of these stocks going into this quarter is one the great mis-pricings I have seen in ages. I know I had stopped flogging them, and I had been in there saying they were terrific stocks, when they stopped going higher as the rest of retail caught up.
I spotted the possibilities for downside here from the discipline that says these stocks had gotten so expensive that there was no margin for error. They were the polar opposite of Macy's (M) , Kohl's (KSS) and Nordstrom (JWN) , with stocks that had gotten so cheap going into the quarter that they were bushels of error allowed and they still wouldn't go down.
In other words, my desire to wait for lower prices came from a belief in how stocks trade, not in how companies do. You need all sorts of skills in this business to do well.
That's not luck. Remember, I am a generalist. It is my job to use everything: charts, history, discipline, eyes, ears, because I am not out there talking to all of the managements of all of the different companies I follow.
The analysts are, though -- or are supposed to be, which is why this blindside was so particularly cruel.
I would normally like to take an interest in a high quality company like Dollar General with a gigantic decline like this, but what that decline tells me is that this is a gigantic reset.
There are so many questions here.
- The new food stamp changes that cut eligibility for 500,000 back in April; does it turn out that eligibility was reduced to more people than that? And why weren't the analysts more aware of the ramifications of that?
- How off in pricing is Dollar General, how much of a gap does it want between it, and, say, Walmart, that it had to make those cuts, which pretty much came right off the bottom line, and why weren't analysts more aware of the 10% reduction in those popular categories? Dollar General says it wants to be "proactive", but it was so "proactive" it shocked the Street. Too proactive?
- When did food deflation get so out of control that supermarkets are just getting crushed by it, and not just by pennies, but by chunks of earnings, and why isn't it more visible? How much of the deflation is perishables and pricing can snap back? How much of it is somehow weirdly secular?
- What is the impact of "trade up"? We know that historically dollar stores act counter-cyclically. We also know, though, that given the incredibly positive changes made at the stores as places to shop, we had thought that the counter-cyclicality had lessened and that consumers had decided they just plain old liked the bargains and the feel of the places. A new, frugal, post-recession consumer just wasn't going to trade up? But what if Walmart and now Target (TGT) have had to lower prices so much that it can capture these people back? That seems to be the case. It's not so much "trade up" as Walmart and Target "trading down on price." Kroger (KR) is doing it, too.
In the end if it were just food stamps as an issue, then we could price it in. Just Walmart, we can price it in. Just a certain amount of items, we can price it in. But the combination of an improving economy that has historically been bad for these companies, coupled with a renewed and aggressive Walmart, a cut in food stamp eligibility and a management team that communicated so poorly that you had open rebellion and confusion on the conference call says to me, sit this one out.
You will have plenty of time to buy a stock of a company where a dollar price tag is too high to woe the faithful. You want to own a 90 cent store, when the 10 cents went to the consumer, not the shareholder?
No thanks.
