Dollar General is best-positioned for COVID-19 economic fallout: Wells Fargo

On Tuesday, Wells Fargo upgraded shares of Dollar General to overweight, on the premise that the variety store chain has a number of under-appreciated tailwinds gaining steam it thinks make the stock a particularly attractive investment at the moment. The firm believes that Dollar General remains a solid long-term growth story that is only just beginning to better leverage its growing scale in staples retail.

Video Transcript

JEN ROGERS: Some people are nervous to say it, that we're in a recession. Myles Udland is not. He said earlier we're in it. Myles, other people say probably, maybe, but no, not this time. It definitely seems to be happening.

And Wells Fargo is out with a note upgrading Dollar General to overweight on numerous tailwinds, chief among them that if you're going to be in a sustained recession, they say, Dollar General is the place to be. And this all plays into actually the stimulus and where the stimulus dollars are going, right?

MYLES UDLAND: Yeah, I mean, you know, the sustained recession is actually like a bonus tailwind. Wells Fargo seems to be, you know, fired up enough on this stock to upgrade it just based on how much of a benefit the likely Dollar General shopper is going to see from the checks that are supposed to be sent out by the end of April. So they compare kind of what the stimulus measures are going to be for a typical household compared to what we saw during, you know, the payroll-tax cut, 2011, you know, emergency spending bills back in '08 and 2009. This is basically double the magnitude in terms of households getting direct benefits, direct savings-- in this case, a direct infusion of cash-- relative to anything else we've seen over the last 15 years.

And I think that, you know, the fact that this isn't just, you know, framed as a payroll-tax cut or some benefit that shows up over time-- remember back in 2014-15 there was supposed to be this huge consumer benefit because everyone was saving at the pump. I mean, I am aware that these checks-- and I believe these checks are not enough. I mean, this is not going to be enough to hold people over, but it is going to be actual cash that shows up or an actual check that shows up at the door.

And, you know, low marginal-- or high marginal propensity to consume consumers, folks who make less money, this is a higher percentage of their overall income base. And for a store that is a hard discounter-- not a hard discounter but a discount store like Dollar General, you know, Wells and I imagine other analysts on the Street are going to see this as a huge benefit for these companies that are trying to deliver the most value to the most people.

JEN ROGERS: And while they do like a number of the companies in the space, I thought one of the things that was interesting about why they like Dollar General is actually the mix at DG. 80% of the mix there is consumables. And if you're going to be going out, you're buying not luxury items at the store. You're buying the consumable ones. Dollar Tree is about 60%. Walmart's about 50%. So they really think that the mix leads to them having a very strong position here.