Sock Sonar #25 - 9/20/2023

Dollar General (NYSE:DG) — mrkt cap $25.2B; Price $115.41; trailing P/E 12

PASS. DG is a low-cost retailer that has dropped more than 50% YTD. DG targets geographic exclusivity by operating in small rural areas that larger competitors such as Walmart do not enter. DG has recently run into supply-side issues due to recent expansion of new offerings such as popshelf and refrigerated goods, resulting in large inventories and subsequent write downs. These issues are largely self-inflicted and the core business remains strong, however management needs to demonstrate a return to core competencies before DG can become investable.

Sally Beauty Holdings (NYSE:SBH) — mrkt cap $867mm; Price $11.41; trailing P/E 14

PASS. SBH is a beauty retail store with roughly 3000 stores worldwide. SBH has seen anemic FCF growth over the last several years while competitors such as ULTA have roared ahead. SBH has recently undergone management changes and the previous CFO of Sprouts is now the current CEO. In situations like SBH in which there has been non accretive growth and a bloated cost structure, management prioritizing streamlining of costs over growth aspirations is preferable. This is currently underway with over 350 stores shuttered and 2 distribution centers closed over the last six months. SBH enjoys high gross margins (greater than 50%) given a large portion of their revenues come from both private label and exclusivity arrangements. With measured growth initiatives to refresh the brand and continued cost-cutting, SBH could become interesting. We will wait for further turnaround developments before initiating a position.

Pitney Bowes (NYSE:PBI) — mrkt cap $556mm; Price $3.16; trailing P/E NA

PASS. Pitney Bowes is the largest workshare partner of the USPS and provides tech and services to companies to send, track, and receive parcels and letters. PBI also operates an unprofitable e-commerce segment despite repeated promises from management that profits are right around the corner. Activists are calling for an ousting of the CEO and a sale of the unprofitable e-commerce segment. The optimistic case is that activists are successful, and the E-commerce segment sells for ~1 billion. Although this would see the stock pop, to invest we would have to have conviction in the staying power of the remaining underlying business which we do not have given USPS mail volumes have been on a secular decline. 

Leave a Reply

Your email address will not be published. Required fields are marked *