We recently compiled a list of the 7 Best Department Store Stocks to Buy According to Hedge Funds. In this article, we are going to take a look at where Dollar General Corporation (NYSE:DG) stands against the other department store stocks.
Holiday Season Trends in the Retail Industry
With the holiday season approaching, discussions and concerns about expected consumer spending are increasing. According to Deloitte’s annual holiday survey, shoppers are feeling more optimistic despite concerns about inflation, and are planning to increase their holiday spending by 8% year over year. On October 19, Brian McCarthy, Principal of Retail Strategy and Transformation at Deloitte, joined Brad Smith on Yahoo Finance’s Wealth! to discuss what he calls an expected record-breaking shopping season.
As per Deloitte’s latest holiday retail survey, consumers are planning to spend more money in this year’s holiday season, primarily due to a “rosier economic outlook.” He says that we are seeing a 9 percentage point increase in positivity towards the economy’s future. In addition, the overall consumer perception of higher prices is also a factor, with around 70% of shoppers believing that their prices for gifts in 2024 will be higher than in 2023.
Retail executives are also optimistic about the upcoming season, with 80% expecting to see stronger sales both online and in brick-and-mortar. As per the survey, consumers plan to spend a record-high average of around $1,778 this year, with the average consumer spending experiencing an 8% increase from the 2023 survey. These trends are expected to emerge despite the inflationary and price pressures that some consumers have cited. McCarthy told Yahoo Finance:
“We’re seeing after this year of frugality and restraint, consumers are feeling a bit more optimistic about the economy. They’re planning to have a very festive holiday season.”
The Brand Loyalty Crisis of the Season
An interesting brand loyalty crisis is also emerging this holiday season. Consumers are looking for better prices and deals instead of going back to the brands they always shop at. They are looking for the best value and are generally inching away from brand loyalty, prioritizing quality and price over brand names and tags. According to McCarthy, consumers seek quality, value, and variety when they go holiday shopping. He says that:
“With the perception of higher prices still top of mind, consumers are really caught between trying to stretch their wallets and being festive and so this really means they’re torn between seeking value and remaining loyal.”
He further says that around two-thirds of consumers are expected to switch brands if they find the price too high, and around 50% are willing to switch retailers to save. In addition, 78% of shoppers plan to participate in promotional events this October and November. Trends also show that privately labeled brand sales are expected to grow faster than national brand sales this year.
He suggests that retailers must ensure that they provide good quality, good value price points, and a variety of selection that attracts consumers. He also offers advice to consumers looking to save some dollars without slashing items from their holiday list, saying that:
“Shoppers are encouraged to explore multiple retailers to look for a competitive deal or a price point that they think is going to work for them.”
He adds,
“I have found AI is a really interesting thing to start asking for where you may find particular products or promotional deals so you can use technology to be a bit more savvy that way.
We recently published an article on the 10 Cheap Retail Stocks to Buy According to Analysts. Here is an excerpt from the article:
“According to the WTW Global Retail Survey for 2024, around 52% of retailers this year expect increased profitability in the coming two years. In addition, approximately 48% of retailers are looking to leverage artificial intelligence in their operations to offer their customers a personalized and efficient shopping experience. However, with more and more businesses turning towards AI, around 43% of the respondents voiced concerns about high cybersecurity risks likely to arise with increasing reliance on new technologies. Despite the risks, a majority of retailers are incorporating AI into their operations, streamlining and expediting their functioning”.
Our Methodology
To compile a list of the 7 best department store stocks to buy according to hedge funds, we consulted the Finviz and Yahoo Finance stock screener to compile a list of the top 15 department store stocks. We then choose the top 7 stocks with the most number of hedge funds. The list of the 7 best department store stocks to buy according to hedge funds is arranged in ascending order of number of hedge fund holders as of Q2 2024.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A busy shopping aisle filled with discounted items in a retail store.
Dollar General Corporation (NYSE:DG)
Number of Hedge Fund Holders as of Q2 2024: 42
Dollar General Corp (NYSE:DG) is an American retailer with a chain of stores across Mexico and the US. It offers a range of discounted merchandise, consumable products, and non-consumable items such as seasonable merchandise. The company operates around 20,000 stores and plans to open more than 800 stores across the US. It also announced plans to remodel around 1,500 locations and relocate 85 stores in 2024.
It is making significant progress on its back-to-basic plans, with net sales increasing by 4.2% to $10.2 billion in fiscal second quarter of 2024 compared to net sales of $9.8 billion in fiscal second quarter of 2023. Dollar General Corp’s (NYSE:DG) top priority is to improve its on-time and in-full truck delivery rates, which it refers to as OTIF. The company’s focused efforts have led to significantly higher OTIF levels compared to last year, with improvements in both fresh and traditional supply chains.
It has also made significant progress in optimizing its distribution capacity. It is closing the less efficient temporary facilities, and building and opening two new permanent distribution centers in Colorado and Arkansas. The company expects to ramp up operations in the coming months, positively contributing to reduced transportation costs and a reduction in stem miles over time.
Dollar General Corp (NYSE:DG) is also undertaking the first full-scale refresh of its sorting process within its distribution centers since the launch of its Fast Track initiative in 2017. The ultimate goal of this initiative is to enable its store teams to stock shelves quickly, driving greater on-shelf availability for its customers and boosting ongoing sales growth. It has made significant progress on this front, and is on track to complete it by the end of the year.
Artisan Value Fund stated the following regarding Dollar General Corporation (NYSE:DG) in its fourth quarter 2023 investor letter:
“Our biggest full-year detractors included energy holdings Schlumberger and EOG and 2023 purchases Baxter International and Dollar General Corporation (NYSE:DG). Dollar General, a discount retail chain in the US, has dealt with a few struggles. The retailer had previously benefited from COVID stimulus checks, reflected in the bump it experienced in revenues and margins.
However, the effects have worn off, and its core consumer has been hurt by inflation, stiffer economic conditions, lower tax refunds and reduced SNAP benefits. Margins are also under pressure due to labor costs, shrink and markdowns. Some of the issues are likely self-inflicted. After years of focusing on store growth to drive the top line, store standards have suffered. Addressing store standards is needed to turn around flagging traffic, comps and customer satisfaction. On the positive side, discount retail due to its trade-down feature tends to be a defensive business during economic slowdowns.
Dollar General has a strong market position and faces less competition than other discounters due to its largely rural footprint. The business’s value proposition is everyday low prices, a convenient format, and proximity. The company has leverage due to capital expenditures, but interest coverage of ~9X is strong. From a valuation perspective, the froth from the pandemic, when it traded in the low- to mid-twenties, is gone. So, we aren’t paying for margin upside or store growth. Those would be bonuses. If the company can continue to grow revenues, generate cash flow, and buy back stock, we still see a path to success.”
Overall DG ranks 5th on our list of the best department store stocks to buy according to hedge funds. While we acknowledge the potential DG as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than DG but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.