Musical Chairs at Dollar General
Investors were euphoric when Dollar General brought back its former CEO less than a year after his retirement. A sober look at the situation reveals significant concerns.
On October 12, Dollar General announced the return of Todd Vasos as Chief Executive Officer. Mr. Vasos previously served as CEO from June 2015 to November 2022. The news came after the close of trading on a day when Dollar General’s stock closed at $101.83, down 61% from its 52 week high, and settling at levels last seen in 2018. The news was greeted with enthusiastic applause by investors and traders the following day with the stock closing up 9.2%. The rally has continued this week with the stock trading at $117 this morning.
Mr. Vasos was 61 years old at the date of the company’s most recent proxy statement released on April 11. According to the press release, he has agreed to return for the “foreseeable future.” Mr. Vasos replaces Jeff Owen, a Dollar General veteran with nearly thirty years of experience who previously served as Chief Operating Officer reporting to Mr. Vasos. Mr. Owen was 53 years old at the date of the proxy. Mr. Owen resigned from the board and left the company upon his dismissal as CEO.
The press release provided little context for firing Mr. Owen, but the board clearly lost confidence in his leadership based on this brief excerpt:
“The Board has tremendous respect for Jeff and greatly appreciates his many contributions to the Company, especially during his long tenure leading our retail operations,” said Michael Calbert, Chairman of Dollar General’s Board of Directors. “However, at this time the Board has determined that a change in leadership is necessary to restore stability and confidence in the Company moving forward.”
At the end of the release, the company provided updated guidance for its fiscal year. Same-store sales are now expected to range from a decline of 1% to 0% compared to previous guidance of a decline of 1% to growth of 1%. Diluted earnings per share is expected to range from $7.10 to $7.60 compared to previous guidance of $7.10 to $8.30. It is reasonable to believe that the company’s stock would have declined if the updated guidance had been released without the dramatic news of a leadership change.
I have been following Dollar General since the company announced poor quarterly results in late August that sent its stock diving to the $130 level. I followed up my initial analysis with a visit to a Dollar General and Family Dollar location last month.
The following articles provide my recent thoughts on the company’s situation:
My initial reaction when I read the news release was that this abrupt management change signaled bad news for Dollar General.
As discussed in my earlier articles, bulls and bears have been arguing about whether Dollar General’s recent woes are due to macroeconomic factors or company-specific miscues. If the problems are mostly macroeconomic in nature, it is reasonable to believe that Dollar General will weather the cyclical storm given its long history and scale of operations. On the other hand, company-specific problems could be harder to remedy and result in long term impairment of earnings power and a lower valuation.
The firing of Mr. Owen makes it clear that the board either believes the problems are company-specific or made the change to do something dramatic to counter the effect of lowering guidance. But for now let’s give the board the benefit of the doubt and assume that they were not acting in order to boost the stock price in the short run.
The press release refers to “restoring stability and confidence.” It seems to me that problems of a primarily macroeconomic nature should not logically cause the board’s confidence to plummet to the point where they must fire a CEO with three decades of experience at the company who has been in the top job less than a year.
The more ominous concern is the possibility that Dollar General’s underlying strategy is so fragile that it can be seriously damaged by a new CEO in just a few quarters. If bringing back the prior CEO is meant to “restore stability and confidence” in the company, it follows that Mr. Owen was able to cause instability and loss of confidence in less than a year! If this logic holds, it points to a potentially fragile business model.
Continuity or a New Direction?
Is it reasonable to believe that the selection of Mr. Owen as CEO in November 2022 represented continuity or a new direction for Dollar General?