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Turnaround situations are notorious for rarely turning around. They do have a reputation for delivering spectacular returns, if and when a company can actually turn things around. Once a company has lost its way, it is very difficult to regain market share or become profitable even if new management is at the helm.
We discussed this briefly in a Twitter thread after an insider purchase at General Electric (GE) by Larry Culp. Despite his excellent management of Danaher (DIS) from 2000 to 2014, Culp had a hard time turning around a behemoth like GE in the nearly 3.5 years since he took the top job.
We speculated that maybe 2023 is the year when things finally turn around for GE and turn around they did. The stock is up 95% this year, far exceeding the performance of the S&P 500. When we dug in under the hood of GE, we liked the turnaround story so much that we made the company a spotlight idea in the June 2023 special situations newsletter. We summarized our thesis about GE as follows:
With a few noteworthy exceptions, executives returning to assume their previous roles often find success elusive. Walt Disney (DIS), under the renewed leadership of Bob Iger might be one of those exceptions. Howard Schultz who served as Starbucks (SBUX) CEO three times, played a pivotal role in building a corporate success story and leading a successful rebound for the company.
On October 12, 2023, Dollar General Corporation (DG) announced Todd Vasos, current Board member and former Chief Executive Officer, has been appointed CEO effective immediately. Mr. Vasos has agreed to return to lead the company for the foreseeable future.
As you will see further down in this article, the kind of performance the company delivered in Q1 and Q2 compelled investors to “sell first and ask questions later”. It was hard not to cringe when reading through the conference call transcript of the most recent earnings call. Whether it was inventory levels, discounting activity or same store sales, the bad news was everywhere. Mr. Vasos has his work cut out for him.
Welcome to edition 63 of C-Suite Transitions, a weekly series on InsideArbitrage that tracks appointments and departures at publicly traded companies during the prior week. We highlight five appointments and departures each week by picking the largest companies from the full list of management changes.
Sudden Departures
Dollar General (DG): $116.02
Market Cap: $25.46B
Enterprise Value: $43.15B
Key Insights
Dollar General, a discount retailer, offers a variety of affordable household goods, groceries, and everyday essentials. The company caters to budget-conscious shoppers in diverse communities that are often less than 1,000 in population. With over 19,000 locations across the United States, Dollar General aims to provide convenient and cost-effective shopping options for a broad range of consumer needs.
Todd Vasos
Mr. Vasos initially joined Dollar General in 2008, assuming various roles before ascending to the position of CEO in 2015.
During his initial seven-year tenure as the Chief Executive Officer of Dollar General, Todd Vasos spearheaded a period of significant growth and transformation for the company. His strategic leadership saw the addition of 7,000 stores, the generation of nearly 60,000 jobs, and a remarkable doubling of the market capitalization to approximately $58 billion.
Mr. Vasos’ initial annual salary will be $1.4 million, with eligibility for yearly cash incentive bonuses and a one-time award of a nonqualified option to purchase 250,000 shares of Dollar General’s common stock, according to a SEC filing.
As a nice cherry on top, the company also included half a million dollars worth of personal air travel for Mr. Vasos. The SEC filing specifically goes on to say:
“…the Company shall reimburse Employee up to Five Hundred Thousand Dollars ($500,000) per calendar year (prorated for the 2023 calendar year as provided below) for the reasonable costs incurred by Employee during such calendar year for personal air travel to and from Employee’s residences and personal visits with his immediate family (i.e., parents, spouse, and children, including step and in-law) in locations within the continental United States.”
According to the press release, Chairman of Dollar General’s Michael Calbert said, “ ..at this time the Board has determined that a change in leadership is necessary to restore stability and confidence in the company moving forward.”
The price chart below depicts Todd Vasos’s productive performance during his tenure as CEO.
Jeffery Owen is being replaced less than a year after his appointment as CEO in an effort to stabilize the struggling business according to the company.
Under Owen’s leadership, Dollar General witnessed a sharp decline in its share price, plummeting from slightly above $250 on the day he assumed the role to $101.83 as of the stock market closing on October 12.
The stock fell nearly 60% during Jeff Owens’s tenure.
As part of his severance package, Mr. Owen is set to receive two years of his base salary totaling $2.25 million, along with a lump sum double his annual target bonus for the current fiscal year, outplacement services for up to one year, and additional benefits according to SEC filing.
The chart below depicts the decline during Mr. Owen’s tenure as CEO.
Dollar General has encountered significant challenges in both sales and profit due to shifts in consumer purchasing patterns driven by escalating inflation. The company’s second-quarter earnings report highlights a trend where shoppers are allocating more of their budget to groceries while reducing spending on more lucrative items such as home goods and apparel. Additionally, Dollar General is contending with increased capital expenses, rise in inventory shrinkage, decline in store traffic, and heightened competition.
Peers
Dollar General is significantly trailing behind its counterparts, Dollar Tree (DLTR), and Five Below (FIVE).
Just like Dollar General, Dollar Tree appointed a new CEO at the beginning of this year. Dollar Tree Executive Chairman Richard Dreiling replaced Chief Executive Officer Mike Witynski nearly a year after agreeing to revamp its board in a settlement with activist investor Mantle Ridge.
While Dollar Tree, under the leadership of Rick Dreiling, has experienced notable progress, Dollar General has faced challenges, notably in under-investing in its stores, particularly concerning labor. This underinvestment may have impacted the overall customer experience and operational efficiency at Dollar General locations.
Dollar Tree reported that same-store sales increased by 7.8% this quarter compared to Dollar General where it decreased by 0.1%.
The table below provides a comparison of the three companies.
Dollar General Deemed ‘Severe Violator’ by Labor Dept
Dollar General has struggled with a number of labor issues. The Labor Department’s Severe Violator Enforcement Program, designed to address unsafe working conditions, has targeted companies, including Dollar General, known for frequent injuries or fatalities.
Since January 2017, The Occupational Safety and Health Administration (OSHA) has inspected over 270 Dollar General stores, discovering 111 workplace safety violations and imposing penalties exceeding $21 million. Violations include obstructed fire exits and unsafe merchandise stacking.
OSHA announced in October that it added Dollar General to its Severe Violator Enforcement Program.
Share Repurchases
As intended, the company refrained from repurchasing any shares in the second quarter of 2023 as per its share repurchase program. The total remaining authorization for future repurchases was $1.4 billion at the end of the second quarter of 2023. The company’s guidance also continues to assume no share repurchases in 2023.
Valuation and Dividend
The company has a market capitalization of $25.75 billion, an enterprise value of $43.43 billion, and net debt of $6.95 billion after excluding capital leases. The forward EV/EBITDA ratio is 13.28 and the forward P/E at 15.69.
Dollar General pays a quarterly dividend of $0.59 per share, which works out to an annual yield of 2.01% at current prices and a payout ratio of 23.36%.
Second Quarter 2023 Results (Press Release)
Fiscal Year 2023 Financial Guidance Update (Revised)
Dollar General narrowed its outlook for fiscal year 2023, provided on August 31, 2023.
The company now expects:
Conclusion
Given that Todd Vasos was always an active board member even after stepping down from his executive position, the transition may be expedited with minimal disruption.
Mr. Vasos had successfully doubled the company’s market capitalization during his previous stint. The pressing question now emerges: Can this accomplishment be replicated once more under his renewed leadership?
We are not so confident and it would be better to see signs of an actual turnaround before considering the company as an investment.
Appointments
1. CNO Financial Group (CNO): $24.07
On October 16, 2023, CNO Financial Group announced that Michellen Wildin has been named Senior Vice President, Accounting, effective October 23, 2023, and will succeed to the role of Chief Accounting Officer of the company on January 1, 2024.
| MarketCap: $2.72B | Avg. Daily Volume (30 days): 681,326 | Revenue (TTM): $3.91B |
| Net Income Margin (TTM): 1.36% | ROE (TTM): 2.52% | Net Debt: $3.52B |
| P/E: 52.89 | Forward P/E: 8.03 | EV/EBIDTA (TTM): 9.99 |
| P/S (TTM): 0.72 | P/B (TTM): 1.36 | 52 Week Range: $18.85 – $25.87 |
2. OPAL Fuels (OPAL): $6.98
On October 10, 2023, OPAL Fuels appointed Scott Contino as Interim Chief Financial Officer. Mr. Contino will assist Ann Anthony during the transition and take on the CFO role on the date of Ms. Anthony’s departure, once determined.
| MarketCap: $1.27B | Avg. Daily Volume (30 days): 243,210 | Revenue (TTM): $231.27M |
| Net Income Margin (TTM): 23.03% | ROE (TTM): 43.77% | Net Debt: $117.10M |
| P/E: 9.91 | Forward P/E: 66.23 | EV/EBIDTA (TTM): N/A |
| P/S (TTM): 0.84 | P/B (TTM): N/A | 52 Week Range: $5.25 – $10.25 |
3. John Wiley & Sons (WLYB): $29.33
On October 10, 2023, John Wiley & Sons announced the appointment of Matthew S. Kissner as interim President and Chief Executive Officer.
| MarketCap: $1.63B | Avg. Daily Volume (30 days): 479 | Revenue (TTM): $1.98B |
| Net Income Margin (TTM): -2.88% | ROE (TTM): -5.66% | Net Debt: $939.09M |
| P/E: -28.64 | Forward P/E: 14.97 | EV/EBIDTA (TTM): 8.09 |
| P/S (TTM): 0.83 | P/B (TTM): 1.73 | 52 Week Range: $28.58 – $49.19 |
4. Integer Holdings (ITGR): $74.53
Integer Holdings Corporation appointed Diron Smith, who currently serves as Interim Chief Financial Officer, as the Executive Vice President and Chief Financial Officer of the company, effective October 9, 2023.
| MarketCap: $2.48B | Avg. Daily Volume (30 days): 181,182 | Revenue (TTM): $1.49B |
| Net Income Margin (TTM): 4.77% | ROE (TTM): 5% | Net Debt: $1.02B |
| P/E: 35.65 | Forward P/E: 14.73 | EV/EBIDTA (TTM): 13.89 |
| P/S (TTM): 1.67 | P/B (TTM): 1.72 | 52 Week Range: $55.22 – $96.17 |
5. Reynolds Consumer Products (REYN): $25.75
On October 12, 2023, Reynolds Consumer Products announced that its Board of Directors has appointed Scott E. Huckins as the company’s Chief Financial Officer, effective November 13, 2023.
| MarketCap: $5.41B | Avg. Daily Volume (30 days): 290,586 | Revenue (TTM): $3.87B |
| Net Income Margin (TTM): 6.13% | ROE (TTM): 13.04% | Net Debt: $2.03B |
| P/E: 22.81 | Forward P/E: 16.86 | EV/EBIDTA (TTM): 13.77 |
| P/S (TTM): 1.40 | P/B (TTM): 2.91 | 52 Week Range: $24.80 – $31.45 |
1. Ally Financial (ALLY): $25.62
On October 11, 2023, Ally Financial announced that Jeffrey J. Brown had provided notice of his intent to retire as Chief Executive Officer and a member of Ally’s Board of Directors on January 31, 2024, or earlier.
| MarketCap: $7.73B | Avg. Daily Volume (30 days): 4,344,003 | Revenue (TTM): $7.50B |
| Net Income Margin (TTM): 16.34% | ROE (TTM): 8.92% | Net Debt: $12.47B |
| P/E: 7.00 | Forward P/E: 5.53 | EV/EBIDTA (TTM): N/A |
| P/S (TTM): 0.85 | P/B (TTM): 0.69 | 52 Week Range: $21.12 – $35.01 |
2. IPG Photonics (IPGP): $93.68
IPG Photonics Corporation announced that Felix Stukalin, the company’s Senior Vice President, Chief Operating Officer and member of the company’s Board of Directors, passed away on October 6, 2023.
| MarketCap: $4.44B | Avg. Daily Volume (30 days): 186,429 | Revenue (TTM): $1.37B |
| Net Income Margin (TTM): 7.73% | ROE (TTM): 4.22% | Net Cash: $1.08B |
| P/E: 42.86 | Forward P/E: N/A | EV/EBIDTA (TTM): 11.96 |
| P/S (TTM): 3.32 | P/B (TTM): 1.85 | 52 Week Range: $79.88 – $141.85 |
3. John Wiley & Sons (WLYB): $29.33
On October 10, 2023, John Wiley & Sons announced the departure of Brian A. Napack from the company as President and Chief Executive Officer.
| MarketCap: $1.63B | Avg. Daily Volume (30 days): 479 | Revenue (TTM): $1.98B |
| Net Income Margin (TTM): -2.88% | ROE (TTM): -5.66% | Net Debt: $939.09M |
| P/E: -28.64 | Forward P/E: 14.97 | EV/EBIDTA (TTM): 8.09 |
| P/S (TTM): 0.83 | P/B (TTM): 1.73 | 52 Week Range: $28.58 – $49.19 |
4. Fastenal Co. (FAST): $58.79
On October 9, 2023, Terry M. Owen resigned as the Chief Operations Officer of Fastenal company effective October 31, 2023.
| MarketCap: $33.59B | Avg. Daily Volume (30 days): 3,813,001 | Revenue (TTM): $7.28B |
| Net Income Margin (TTM): 15.57% | ROE (TTM): 34.23% | Net Debt: $241.40M |
| P/E: 29.70 | Forward P/E: 27.32 | EV/EBIDTA (TTM):20.06 |
| P/S (TTM): 4.65 | P/B (TTM): 9.94 | 52 Week Range: $43.20 – $60.93 |
5. OPAL Fuels (OPAL): $6.98
On October 5, 2023, Ann Anthony gave notice of her intention to resign as Chief Financial Officer of OPAL Fuels to pursue another professional opportunity. Ms. Anthony’s departure date has not yet been determined.
| MarketCap: $1.27B | Avg. Daily Volume (30 days): 243,210 | Revenue (TTM): $231.27M |
| Net Income Margin (TTM): 23.03% | ROE (TTM): 43.77% | Net Debt: $117.10M |
| P/E: 9.91 | Forward P/E: 66.23 | EV/EBIDTA (TTM): N/A |
| P/S (TTM): 0.84 | P/B (TTM): N/A | 52 Week Range: $5.25 – $10.25 |
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