DG: KM Stepping Up to Short – Again
Keith is going back to the well on DG today, shorting a name that we’ve been cautious on since its re-emergence as a public company back in November of 2009. We remain convinced that the opportunity to sustain both unit and comp growth is becoming harder to achieve. Despite reporting solid results on March 31st, it appears that Q4 F09 is likely to mark the post-offering peak for DG as it relates to rate of acceleration in business growth.
With the stock up over 12% since the Q4 print and coincidentally at the average price target ($29) of the seven brokers launching coverage after the IPO and several quarters of earning pretty much anything it wanted – 2010 will likely prove to be a different story. This is a year where both top and bottom line compares for DG will be at their toughest in the company’s history. Comp guidance is suggesting deceleration and reliance on margin enhancing strategies such as “better buying”, increased private label penetration, and improvement in more discretionary categories such as home and apparel is far more speculative and risky than it has been over the past year. At the same time year-over-year GM compares get very difficult effective immediately, and SG&A/Capex begin to accelerate along with stepped up square footage. We continue to believe momentum will slow on the margin, much like it has already done with the pace of Americans entering the “sweet spot” of the DG demographic.