Here’s the key trend that we think came out of the DG release. Consumables as a percent of sales grew, but at a decelerating rate. In fact, it declined sequentially (on a ttm basis) for the second quarter in a row. Common logic says that this is not that bad given that consumabales tends to be a lower Gross Margin business. That’s true. But it’s also a very big traffic driver. Fewer people coming in the door to buy higher margin items leaves us with slower growth and ‘hope’ that the company can appropriately manage inventory on seasonal items (it’s easier to manage inventory on milk and frozen broccoli than it is socks, backpacks, and Nerf Uzi Waterguns). This gives us less confidence that the company can sustain comps in the 4-5% range – which the Street has pretty much straightlined into eternity.
Oh, and by the way, Food Stamp stats came out yesterday, and participation growth continues to decelerate. Even though the numbers remain high – i.e. seemingly good for dollar stores – keep in mind that the increase in the participation rate from 9% to 15% over the last 5-years has also been a driver of traffic and comp for the dollar stores and other deep discounters. If the rate of participation continues as it is trending today, then it should be negative by year end.
Lastly, our Retail Sentiment monitor, which is a quantitative index of both Sell Side ratings, Buy side ownership/short interest, and insider buying/selling is near peak levels for DG. From a signaling standpoint, you almost never want to be building a position when a company has a sentiment score nearing 90%. In fact, you want to start selling or building short positions. We’d back that up from a fundamental perspective.