Last week, DG released its Q4 result. Revenue was up 13.6% yoy while earnings up 10.1% yoy. It’s considered a good result, and its EPS of 1.49 beat analyst estimate of 1.41. Its share price was up nearly 4% on the day of announcement, but now it’s nearly 3.5% below the pre-announcement price.
I bought it at 72.89 in September 2015. It fell to 60 in November 2015, rose to 95 in July 2016, plunged to 75 after Q3 result in August, rose to 80 in November and now fell to 69.I turned from paper loss of 17% to paper profit of 30% to flat. In the end, I sold out in February 2017 at 77.95. Including dividends (taxed at 30%) and after all fees and exchange rate, the net return is 6.7% in SGD in 17 months.
Source: Google Finance
That’s rather disappointing return. During the same period, S&P 500 achieved 20% return before dividends. Dollar Tree, DG’s competitor, achieved 17%. So, my purchase of DG was not a good one among the available choices.
Why DG underperformed
If we just focus on DG’s business and financial performance, both revenue and earnings continued to climb over the past two years. The problem is market expectation. It was high when I bought DG.
DG’s higher earnings failed to beat market expectation. In Q2 of FY16, missing the estimate saw the share price plunging by 17% in one day. Q3, again, missed the estimate, and its price fell by nearly 5% in one day.
Changes in Business
Firstly, food prices fell due to low commodity prices and intense competition. The price gap between DG (a discount retailer) and its higher-priced competitors narrowed, making DG less appealing. DG also cut prices for some of its products.
Secondly, food stamps benefit was falling. This reduced benefit cut down the consumer spending, hurting DG’s sales. With US economy still gradually recovering, I expect food stamps benefit to continue its declining trend.
Thirdly, Walmart is fighting back to recapture the retail market share from dollar stores. As you might know, Walmart was not doing well in 2015-2016. Being the biggest retailer, when it wants to fight, the intensity is surely high.
With this changing business prospect, I decided to sell out. It’s a small and disappointing return. But, current share price of 69 is nearly 11% lower than my selling price of 78. So, that’s a bit consolation.
DG’s latest Q4 result was actually quite good, but the share price is still down. Other discount retailers also saw their share prices down for 2017. We can see that discount retailers, or rather, retailers in general, are out of market favor.
I’ll relook at this sector again. Hope something interesting come out later.