Turnaround Stories and Shorting Stocks

**Tyler Crowe** (0:02)
We're talking short sellers and turnarounds today on Motley Fool Hidden Gems Investing.
Welcome to Motley Fool Hidden Gems Investing. I'm your host, Tyler Crowe, and today I'm joined by longtime Fool contributors, Lou Whiteman and Matt Frankel. We're going to be getting into short sellers, specifically short selling research firms after the court decision that came down on Citron Research earlier yesterday. We're also going to look at investor questions related to real estate on the private side, not necessarily REITs that we normally talk about on a publicly traded entity show. But first, we're going to start with Dollar General. I wanted to bring this one up specifically because it's been like a turnaround story for several years.
It's not the most headline grabbing company, but during the 2010s, Dollar General was one of the best performing stocks. It handily beat the S&P 500 And companies that we think of now like Mag 7 companies like Microsoft and Alphabet, Dollar General was beating it. That kind of came to a crashing halt right around 2022 as some trouble started to pile up for various reasons. And the company's been trying to get its act together for a while now. And today, this morning, it just reported earnings, and the numbers said they beat expectations and raised guidance. And yet the stock is down about almost 3% as we're taping this. So, Matt, was this a good result? Or was it just kind of beating bad expectations for what is now kind of a downtrodden stock?

**Matt Frankel** (1:32)
Yeah, well, I mean, Dollar General, you're right, they beat expectations on earnings. On revenue, they missed expectations a little bit. It wasn't all good. Same-store sales, for example, grew 2% year over year. That's less than the rate of inflation. So on a real basis, they actually lost same-store sales. On the other hand, I mean, their margins look good. Gross margin rose 65 basis points, net income increased by 13%.
And as you mentioned, earnings beat expectations. So it missed slightly on the top line, beat on the bottom. I'm not shocked that the stock is under pressure. The company is making good progress on its plan to renovate and improve its existing stores, which is a big cornerstone of their turnaround plan. They did 1,400 of them in the first quarter alone. They're aiming for a little over 4,200 for the entire year. They continue to open stores when they see opportunities. Almost 200 new stores were open during the first quarter. They maintained their revenue guidance for the full year, they raised their earnings guidance. So I'd say things are going okay. They're not going great, but they're going okay.
Yeah, maybe the market debate is in the word good, in good progress. Because yes, there's definitely making progress here, right? This is a promising start to what figures to be a long-term turnaround. They were beaten down, rightfully so, I may add. And the market right now is not in the...
I don't think they want to celebrate just one quarter of a turnaround. They have an ambitious plan. There's nothing in this quarter to suggest that there's anything wrong with the plan. But this is... competition is intense here. In retail, there is no guaranteed winner. You are not entitled to continue to exist. So there is real downside risk. Turnaround, still early days. I think, you know, you give credit where credit is due. But I think the market's right to be cautious here and not to just be cheering just because of one quarter's results.

**Tyler Crowe** (3:18)
I feel like the three of us have been in the same experience here for a while, where I've been to a few value investing conferences over the past few years. And I think I've heard so many like dollar general pitches at these value investing conferences.
I feel like I could set my watch to it and almost do the whole pitch like by memory. Now, it all had like struck the exact same chords. It was like former CEO Todd Vezos is now back in charge again after, you know, that 2020, 2010 kind of run up and like he's the one in charge again. The stuff that's a problem, it is fixable, right? And if you focus on the current store fixing to, like you were talking about Matt in the most recent numbers, instead of really like trying to blow out your store count, which was part of the growths narrative and why it was so successful. You know, all these things happened. You know, boom, we're back at a two times price to sales ratio, eight times book value.
And some of these things are coming true. Sales continue to grow, margins are improving. But at the same time, that valuation standpoint is it hasn't come anywhere close to it. We're still less than one times sales.