The Long and Short
Dollar General remains a positive deleveraging story
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.
Despite recent operational challenges confronting Dollar General (DG: Baa2/BBB), management remains committed to improving cash flows and reducing debt. Inflation continues to pressure US consumers, putting DG in a position to benefit from customers trading down and seeking more value as we approach the holiday shopping season. And while recent operating results caused management to reduce full-year guidance, the company remains undeterred in its back-to-basics strategy and efforts to improve the balance sheet. With limited attractive spread opportunities in the retail-supermarket-pharmacy segment, DG intermediate and long-term bonds present good relative value and a compelling deleveraging story.
Over the past two weeks, IG spreads have been trending below pre-pandemic levels, with the index briefly dropping below +80 OAS, establishing a new five-year historic tight. In that context, most non-financial subsectors are trading with very limited spread opportunity relative to their five-year ranges (exhibit 1). In particular, the retail and supermarket subgroup OAS are presently at just 2% of their five-year historical range, meaning limited spread opportunity and pressure to identify relative value opportunities in those segments.
Exhibit 1. IG Industrial Sub-sector 5-year Spread Percentile Ranks
Source: Santander US Capital Markets LLC, Bloomberg – Sub-sector Indices OAS results
With negative outlooks from both Moody’s and S&P on their mid-BBB ratings, DG bonds are currently trading at some of the widest levels in their appropriate peer group (exhibit 2), presenting an opportunity to bolter spread in one of the tighter trading segments of the index. In the intermediate part of the curve, DG bonds are trading relatively in-line with those of CVS Health (CVS: Baa2*-/BBB), though notably tighter in the long-end of the curve – likely reflecting the tail-risk of a potential CVS restructuring and other long-term challenges of that credit.
Exhibit 2. DG versus Retail/Supermarket/Pharmacy IG credit
Source: Santander US Capital Markets LLC, Bloomberg/TRACE G-spread indications only
DG entered 2024 operating with heightened lease-adjusted leverage of about 3.6x versus a more normal run rate in the 2.5-3.0x range, causing S&P and Moody’s to assign negative outlooks to the ratings in March and April of this year, respectively. More recently, S&P affirmed the debt rating at BBB in September, citing that there is still a path for deleveraging despite operating weakness. The outlook remained negative. The agencies will likely begin looking for progress in early 2025 for reduced leverage but have not given highly specific timelines to achieve debt reduction goals. At current valuation, DG bond spreads appear to already reflect a high degree of risk of downward rating pressure, reducing the potential impact if the company were unable to achieve those goals and prevent a one-notch downgrade to low-BBB.
Nevertheless, management has committed itself to reducing leverage back to a more appropriate operating level of about 3.0x by implementing several strategies. DG has indefinitely suspended share repurchases and has stuck to that strategy even as its share price has faced pressure due to operational challenges. In addition, the company recently allowed a $750 million debt maturity in September to roll off without refunding the debt with a new public debt issue. Those impacts should be realized in the next quarterly earnings report (company scheduled to report on 12/6), though cash flows (i.e. EBITDA) do remain under pressure. Management is currently employing new strategies to reduce shrinkage (inventory damage and theft) in order to shore up cash flows and further improve leverage. Furthermore, DG is making efforts to reduce inventory and capital spending to free up cash for debt reduction. Other goals for 2024 included plans to build roughly 800 new stores, renovate another 1,500 and relocate 85 more.
DG’s liquidity profile remains solid, bolstering its case for maintenance of mid-BBB ratings. They last reported roughly $1.22 billion in cash on the balance sheet as of August of this year, although that number is likely to drop down to a more normal range closer to the $500 million range after accounting for the September debt maturity. In addition, the company has a $2.375 billion revolving credit facility through 2029, which backstops the commercial paper program. There are currently no borrowings outstanding on that facility. DG has a $500 million debt maturity in late 2025, which might provide another opportunity for management to allow a maturity to roll off and reduce total leverage.
When DG reported second-quarter calendar earnings on August 29, management reduced guidance and warned that the competitive environment would force additional price cutting for the remainder of the year. The company’s original goals for 2024 were to achieve same-store sales growth of 2.0 to 2.7% and top-line revenue growth of 6.0% to 6.7%. Management reduced full-year comparable sales projections to 1.0 to 1.6%, sales revenue growth to 4.7 to 5.3%, and revised EPS guidance to $5.50 to 6.20 from $6.80 to 7.55. The news caused the shares to sell off by more than 30% initially and caused bond spreads to widen by about 30 bp at the time. The latter has subsequently recovered much of that initial selloff with improvement in overall credit markets, while the share price has traded relatively flat since then.
Despite weaker guidance, management provided an update on inventory and cash flows that demonstrates successful strides in the company’s efforts to improve overall credit metrics. Total merchandise inventories were approximately $7 billion at the end of the second quarter, which was a 7% decline versus the prior year and down 11% on a per store basis. As a result of the improved working capital position, year-to-date cash flows from operations were $1.7 billion, which was an increase of 127% over the prior year period.
DG is the US’s largest operator of dollar stores with just under 20,000 locations nationwide. Top competitors include obviously big box retails such as Walmart, as well as Dollar Tree, Aldi, and smaller regional dollar store chains. However, the company’s scale gives it access to better and more recognizable national brands than its smaller and regional competitors. The sales mix is heavily weighted to consumables at about 80% of total revenue annually. Management is making a big push to have a more significant impact on the toy market this holiday season with the rollout of special offers and an online and print catalog to stoke customer interest.
This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.
Important Disclaimers
Copyright © 2025 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.
In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.
The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.
In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.
Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.
Important disclaimers for clients in the EU and UK
This publication has been prepared by Trading Desk Strategists within the Sales and Trading functions of Santander US Capital Markets LLC (“SanCap”), the US registered broker-dealer of Santander Corporate & Investment Banking. This communication is distributed in the EEA by Banco Santander S.A., a credit institution registered in Spain and authorised and regulated by the Bank of Spain and the CNMV. Any EEA recipient of this communication that would like to affect any transaction in any security or issuer discussed herein should do so with Banco Santander S.A. or any of its affiliates (together “Santander”). This communication has been distributed in the UK by Banco Santander, S.A.’s London branch, authorised by the Bank of Spain and subject to regulatory oversight on certain matters by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA).
The publication is intended for exclusive use for Professional Clients and Eligible Counterparties as defined by MiFID II and is not intended for use by retail customers or for any persons or entities in any jurisdictions or country where such distribution or use would be contrary to local law or regulation.
This material is not a product of Santander´s Research Team and does not constitute independent investment research. This is a marketing communication and may contain ¨investment recommendations¨ as defined by the Market Abuse Regulation 596/2014 ("MAR"). This publication has not been prepared in accordance with legal requirements designed to promote the independence of research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. The author, date and time of the production of this publication are as indicated herein.
This publication does not constitute investment advice and may not be relied upon to form an investment decision, nor should it be construed as any offer to sell or issue or invitation to purchase, acquire or subscribe for any instruments referred herein. The publication has been prepared in good faith and based on information Santander considers reliable as of the date of publication, but Santander does not guarantee or represent, express or implied, that such information is accurate or complete. All estimates, forecasts and opinions are current as at the date of this publication and are subject to change without notice. Unless otherwise indicated, Santander does not intend to update this publication. The views and commentary in this publication may not be objective or independent of the interests of the Trading and Sales functions of Santander, who may be active participants in the markets, investments or strategies referred to herein and/or may receive compensation from investment banking and non-investment banking services from entities mentioned herein. Santander may trade as principal, make a market or hold positions in instruments (or related derivatives) and/or hold financial interest in entities discussed herein. Santander may provide market commentary or trading strategies to other clients or engage in transactions which may differ from views expressed herein. Santander may have acted upon the contents of this publication prior to you having received it.
This publication is intended for the exclusive use of the recipient and must not be reproduced, redistributed or transmitted, in whole or in part, without Santander’s consent. The recipient agrees to keep confidential at all times information contained herein.
