This Discount Retail Stock Is Overdue for a Turnaround

Who doesn't love a good bargain? Apparently, investors haven't been in the mood for a deep discount this year, as the high-multiple "Magnificent Seven" stocks are still the toast of Wall Street while undervalued businesses have been, well, undervalued.

Yet, as the market continues to pile into these tech titans and largely abandons anything trading near its 52-week lows, one discount retailer has emerged as a screaming bargain in the fourth quarter. Indeed, as traders catch wind of a C-suite shakeup at a well-known dollar store, its stock ought to be on the rebound in short order.

Generally bad results from Dollar General

Dollar General (NYSE:DG) has a lot of items that sell for more than a dollar, but the company's products are nonetheless offered at cut-rate prices. This ought to result in outsized revenue and profits for the company, at least in theory.

However, theory doesn't always pan out in practice, and Dollar General's second-quarter financial results and guidance didn't please anxious investors earlier this year. Starting with the top-line results, Dollar General's quarterly net sales increased 3.9% year over year to $9.8 billion, slightly below analysts' consensus estimate of $9.9 billion.

Of greater concern is that Dollar General's earnings of $2.13 per share badly missed Wall Street's call for $2.47 per share. Making matters worse, its same-store sales declined 0.1% while its operating profit fell 24.2% year over year in Q2.

Dollar General's future outlook was also problematic for nervous shareholders. For fiscal 2023, Dollar General revised its net sales growth guidance from 3.3% to 5% down to between 1.3% and 3.3%. Additionally, the company slashed its fiscal 2023 earnings growth outlook from the previous range of between breakeven and 8% to a decline of 22% to 34%.

Citigroup (NYSE:C) analyst Paul Lejuez's recent comment politely summed up the shock and horror of Dollar General's full-year guidance.

"[T]his is a much bigger cut than we (and the market) were expecting," Lejuez observed.

What has caused this severe pressure on Dollar General's results and outlook? The usual suspects are assuredly in play here, including "inventory shrink" (also known as shoplifting), persistent inflation, recession fears and higher-for-longer interest rates.

Dollar General's second consecutive annual guidance cut only seemed to add insult to injury, eventually driving its stock from $150 before the earnings release to around $100 more recently.

A great value... and a new hope

Amid deep pessimism, prime bargains can sometimes be found. Such may be the case with Dollar General stock, as the company's GAAP-measured trailing 12-month price-to-earnings (P/E) ratio was down to 10.61 as of Oct. 12. For reference, the sector median P/E ratio at that time was nearly twice that figure, at 19.84.

Furthermore, Dollar General has managed to maintain a decent dividend throughout 2023. Currently, the company offers a forward annual dividend yield of 2.28%. Yet, even with this enticing value-and-yield combo, traders haven't been buying the dip with DG stock.

Or at least, they weren't buying until the evening of Oct. 12. In after-hours trading, Dollar General stock jumped 8%. Was this an early leak of the company's upcoming quarterly results, perhaps?

Actually, this sudden buying frenzy came on the heels of Dollar General's announcement that former CEO Todd Vasos is returning to the helm. Vasos is replacing Jeffery Owen, who served as Dollar General's chief executive for less than one year.

Apparently, Vasos' return might be the catalyst Dollar General needs right now. Michael Calbert, chairman of Dollar General's board of directors, declared that this "change in leadership is necessary to restore stability and confidence in the Company moving forward."

Oppenheimer analyst Rupesh Parikh concisely expressed the relief that many stock traders are feeling after learning of this potentially game-changing CEO re-shuffle.

"Following significant execution challenges in recent quarters, we believe this change will be well-received by investors and could help to reinstill confidence in the longer-term DG bull case," Parikh asserted.

Of course, it remains to be seen whether Vasos's re-installation as Dollar General's chief executive actually results in the company's turnaround. Nevertheless, it's encouraging to know that Dollar General's management is prepared to embrace change and try out new leadership, even if Vasos isn't actually new to the role.

Hence, Dollar General's announcement doesn't offer any guarantees of better results, but it does offer hope. As for DG stock, it certainly looks like a compelling bargain for value seekers, passive income investors and anyone who's willing to wager on what might turn out to be a terrific turnaround story in 2024.

Source valuewalk