Dollar Store Doldrums, and Pot Stocks Light Up for a Second Straight Day 8/31/23

0:01Right now on Fast, Dollar Store Doldrum. Shares of low price retailers tanking today as Dollar General sounds the alarm over demand from its shoppers. Are these stocks telling us the true tale of the American consumer? We'll debate that. Plus, in the clear, talk of a recession has been put on the back burner in recent weeks. But is the economy really on steady ground? David Rosenberg isn't so sure. He's here to tell us what has him seeing red flags. And later, move over, Barbenheimer. There's a new blockbuster in town, how Taylor Swift could give the movie business another big boost just when it needs it the most.

0:32I'm Melissa Lee. This is Fast Money. We're live at the NASDAQ Market site on the desk tonight. Tim Seymour, Karen Feinerman, Dan Nathan, and Guy Adami. And we start off with a big warning from Dollar General. Shares plunging after the discount retailer slashed its earnings guidance for the year. The company is seeing slowing sales and rising inventories as its core customer gets pinched. The stock falling to its lowest level in over three years. And it's not the only retailer under pressure. Five Below dropped 6 % today after its earnings report. And Dollar Tree, which warned last week about challenges for its consumers, was down another percent.

1:03So are the dollar stores telling the true tale of how strong the consumer is or isn't? Guy, what do you think? Welcome back, Kay Fine. Oh, thank you. In 09. Nice to be with you all. Now, Jordan and Pippen are back. Remember that? When she was on sports? Of course I do. It was a big push for her to be president of the United. It didn't work. Next time. Or it was better for us, though. She's still here. I think it's telling the tale without question. Other people say you're just trying to look at it through your bearish lens. I get it. But look at the guidance, five below third quarter guidance.

1:33was a disaster. Dollar Gen, this is two consecutive disastrous quarters. The stock has now effectively been cut in half in the last 11 months or so. And what they're telling you is people continue to sort of trade down. And I think it makes sense that Walmart's making an all-time high, given the quarter that we saw them report and given the fact that Walmart wins to all of this. So yes, I think it's telling to tell the consumer. No, I don't think it's sort of, it's not manifesting itself in a broader market. I happen to think it's just a matter of time. We've heard this many times from Dollar General.

2:06Right. Same sort of story. Consumers are trading down. They're buying more consumables, food, which is lower margin. Right. The essentials, basically, instead of the discretionary items. Yeah, it's the Walmart story. It's the Target story where their margins weren't as good because they sell higher margin. Fewer higher margin items got sold than consumables. So this is the same story again. What's interesting to me is this stock has traded down on this story a few times. And you wonder sort of at some point, is it all in? I don't own it, but I was just looking back at the P.E. history. This is near the bottom of the P.E.

2:40multiple trade in the last five years. It should be down for sure. But at some point, and Guy, you would probably have a better feel for this. At some point, I think it won't go down on bad news anymore. So quickly. But they're testing it. If we have a longer term chart, we're at levels we last saw in the throes of COVID in 2020. March, April of 2020 is the last time the stock, to your point. But visually, it's important to see it. So think about that. Karen makes a good point. At a certain level, valuation will take over, and you can only tell a bad story so many times. But this is two consecutive bad quarters.

3:14Maybe this is it. I don't know. At least you're at a level now where you can look at it. I think we're at a point where people are thinking, how many times are they going to tell this bad story? And when will we believe them? Why should we believe management? There's a credibility issue at this point, too. So those are the two things. First of all, Karen hit on the multiple, and I would just say she's right about the last five years on a blended because it's traded at 18, 19 times. But the 10 year pre pandemic multiple is 13 times. So what do you want to put on this thing? And even at 15 times and I see the street downgrades, the downgrades are coming.

3:44So EPS downgrades haven't even caught up to these guys. And the multiple is what's happening here. But but I do think if you look at the new leadership, I think there's a lot of question. I think some of this is not the consumer. I think some of this is dollar gen. Again, this is about market share erosion. This is about questions on leadership. This is about efficiency. They've made a lot of investments in their business. And were those the right ones? So I'm not going to get out here and tell you the consumer is safe. And I feel like everybody here that we've had a lot of evidence of the consumer trading down and the lower end, obviously, under the most pain.

4:15But that there's across the board, this is an issue we're going to hear more about. I'm going to give half of this story to Dollar Gen. It's their problem. But they don't trade. They shouldn't be trading 17, 18 times. Yeah, and broadening out to the consumer, I think you started that. I mean, listen, personal incomes are flattening out, right? We've seen that in the data and definitely in July. You think about consumer credit up, savings going down, and then you think of the surge in spending that we're seeing. So something's got to give at some point. If you put Dollar Gen and Dollar Tree together over the last few weeks, you say to yourself in a very sad manner, like there's something going on at the very low end consumer.

4:49And especially if we stop seeing wages go up, it's like, you know, some of this stuff, some of the inflation that we've been talking about for two years now is becoming embedded. And if the wage inflation is not going to be sticky on the really low end, that's going to paint a really nasty picture, I think, for a low end consumer. And if I'm at the consumer discretionary, like above these guys, I'm starting to get a little bit worried. And especially as we think about, you know, student loan repayments coming back online over the next couple of months or so. We know that back to school was kind of disappointing here.

5:20So to me, I don't think it paints a great picture for the consumer. And I think you want to start looking up because we know for the last year and a half, Walmart had been the beneficiary of this trade down that we've been talking about. And when the Dollar Tree and the Dollar Gen consumer doesn't have anywhere to go, it might be saying something pretty nasty about the consumer. Can we live in a world, though, where it is truly bifurcated and the higher end consumer is OK? And we're still OK in the trade. and the lower end consumer will feel the pain. And we know that that's a terrible situation to be in, but that can be isolated in this economy.

5:53Can we live in that world? I think so. I think that that does sort of seem where we are right now, right? When you see, you know, expensive autos, unable to meet the supply, the demand rather. I mean, there's a lot of evidence of, one other thing though, the market being up, the market being up helps that higher end consumer feel better. feel richer, at least on paper. One thing, though, another thing that's hurting the low-end consumer is gas. And if we look at what's happened to oil, that's a pretty big move. And they really feel that. That's a much bigger part of their pocketbook, of their spend, than for the higher-end consumer.

6:33But you've also made a good point, Karen, that the adjustment that DollarGen has made in terms of wherever the multiple is, but the point is the multiple traded higher than it should over the last three to five years. It traded significantly lower before that. But we are in a place where you really wonder what's been priced in here. And it takes it back to Target. And I know Dan had a view on Target. Again, that number, they have a clean inventory position. So let's talk about Target for a second. I mean, this is a company that's kind of caught somewhere in between. And somewhere when we know what's going on with general merchandise, we know the punishment that the stock has had.

7:08We know the margin pressure. And we know inflation and the dynamics there. So at some point, this is going to get interesting. I just think we're still in the early innings of getting these kind of warnings from companies that are not just on the lower side. And I don't know why you have to run and get them. I think EPS downgrades are coming for everybody in staples and in discretionary. September 23rd, we're going to learn a Costco report, late Costco reports. And that stock is within probably a whisper of an all-time high. Valuation in this environment is stretched without question. They might be winning all this as well, and you're going to find out.

7:40So if Costco blows it out on, I think, in a couple, three weeks from now or so, I think that will, again, sort of reinforce what we're hearing from the dollar stores, makes Walmart makes a lot of sense, and then finds Target in this middle where you don't want to be. By the way, I think, please don't at me, I think 70 percent-ish of Walmart's customers now,$100 ,000 or more in terms of income. Think about that for a second. It's a staggering number. So everybody's moving down. By the way, you're one of those guys who walks around Costco just eating stuff, right? You say that you're judgmental when you say it.

8:12You're trying not to be. I understand that. Why do you think they're out there? It's not like I'm clipping stuff out of them. Folks, he is that guy. I just hope you're buying stuff, too, man. Anyway, for more on the Dollar General weakness, let's bring in Loop Capital Markets Managing Director Anthony Chacumba. Anthony, great to have you with us. How much of this is a tell on the consumer at large and how much of this is specifically a Dollar Gen story? I think it's much more dollar gen story than it is about the consumer at large. I mean, look, I've heard a lot of really salient points that you've made.

8:43I mean, there are some macroeconomic headwinds, but Dollar General hasn't just missed, you know, the last two quarters. It's four out of the last five. It was a management change, and it just doesn't seem like the new gang can shoot straight. So let's not make this all about macro. I think there are some Dollar General specific reasons that they've, you know, started to, you know, sort of shoot themselves in the foot. Anthony, absolutely right. And the stock has been punished on the back of that. But you listen to what that third quarter guidance from Five Below was a disaster. Dollar Tree, not good as well.

9:14There are a few other stores in that same world that are feeling similar pressure. Definitely DollarGen is itself inflicted to a point. But this seems to be bigger than that, in my opinion. Well, the one other thing, and it's kind of macro related, but not macro related. You talk about five below it shrink and that's hitting everyone everyone whether you're talking about a dollar general dollar tree or five below it's hitting a number of retailers and that's you know and that's something that i don't think is going to get much better anytime soon because there generally are just not a lot of consequences um for theft yeah and i would imagine that you know when you're talking about you're hearing the guidance that these consumers at these you know lower end stores are trading down that that underscores the pressure that they are under.

10:01And therefore, that is the environment in which shrink and some of these thefts happen. Yeah, I would definitely agree with that. And yeah, I mean, look, one thing that all these retailers are struggling with, whether it is a Dollar General, whether it's a Dollar Tree, a Walmart or Target, is that makeshift towards consumables. Those are much lower margin relative to discretionary items. And yeah, I mean, I think, yeah, I mean, a struggling consumer, unfortunately, is a consumer is more likely to go for the five finger discount. That's Karen. Thanks for being on. So I thought the traffic numbers for Dollar General actually wasn't great.

10:37How does that compare? Does that sort of go to your point of that's a Dollar General specific thing because the stores weren't inviting or whatever it was? How does that compare to traffic of targets and Walmarts? Yeah, 100%. So look, the easiest comp, the best comp for Dollar General is Family Dollar, which is owned by Dollar Tree. Family Dollar did a nearly 6 % comp last quarter where Dollar General had a small comp decline and Family Dollar had positive traffic. So a lot of this is very Dollar General specific. Specifically, they have been under investing in store labor and it's really starting to bite them right in the keister so anthony when we um talk about and think about investing in retail can we think about it remaining bifurcated or does the economy get to a point where those troubles migrate up up the chain so you know here's the thing i mean retail is a perennial stock pickers market um i'll give you another name that just reported really good numbers today uh ali's bargain outlet and that's also going for a low-income consumer, but they're just executing at a much higher level.

11:46Their merchandising has gotten much, much better. And so I don't think it's necessarily upscale versus downscale because, by the way, there's a lot of pressure right now on high-ticket discretionary purchases. I mean, you saw Best Buy and Williams-Sonoma. Now, in both cases, the numbers were better than expected, maybe better than feared, but in both cases, their comp store sales were down pretty significantly. So I don't think we can just bifurcate at high-end versus low-end. Anthony, thanks for joining us. Anthony Chacumba of Loop Capital. What do you like? I've never shopped at Ollie's, by the way.

12:20I feel like that's a fast money outing. I like bargains. Anyway, I think Anthony's pointing out that there are there's a lot of diversions between execution and opera operational execution and margin and efficiency. And then there are macro pressures here. I would just get back to where we are on dollar gen. And I look at J.P. Morgan's note that came out after those numbers and they took their their EPS and 23 down to seven 76. The street's still at 10 bucks a share. I think there's a lot that needs to be sorted through here. And that's why I think the entire sector becomes difficult to invest in until we really see both the street and the investor community come around.

12:59Karen. Well, I do own Walmart. I do own Target and a Target Walmart spread. I feel like Walmart executed the best of the bunch. And so it's not cheap, though. It is not cheap. The reason for the spread is the divergence between the target multiple, which has really been hit, I think excessively so, and the Walmart multiple. It's just too big of a spread. Our next guest warns the end of summer could be a bummer. The Fed's doves are getting more vocal. Job growth is hitting a brick wall. and GDP is doing something it has never done without a recession following close behind. Rosenberg Research founder David Rosenberg joins us now with more on why September could lead into a winter of discontent.

13:43David, great to have you with us. It seems like everybody and their brothers have given up the call for a recession. They've gone into the soft landing, no landing campaign. Here you are. You're saying recession is still on the horizon. Why are you so still firm and steadfast in this call? Well, look, you know, I've been in this business for 40 years, and I think I've seen it all, or most have seen it all. And, you know, the same consensus that you're talking about was calling for a soft landing all the way into the summer of 2008. And the recession began in December of 2007. So I think it's just human nature.

14:23You know, you had a nice counter-trend rally in the stock market this year. and all of a sudden everybody thinks they have to fit their economic narrative into what the stock market is doing. But the major point I'm going to make is that the recession has been delayed, you could say, but it certainly has not been derailed. And what kept the Energizer bunny going this year, and that's what I refer to the U.S. consumers, the Energizer bunny, is that when we had the excess savings file was real, and everybody seemed to spend all$2.2 trillion. I mean, some of it early on was used to pay down debt, but almost all that money was used for spending.

15:02And it continued right up until now. To me, what's really important is the San Fran Fed, and I think that they actually produced the best research, showed that the batteries for the Energizer Bunny, in terms of the excess savings being put to work in the economy, expire at the end of September. and we know that we're going to have the impact of the student loan, the debt relief program terming out, staring us in the face. And so all these stimulative measures from the fiscal side subside, but what we haven't seen the full impact yet is what the Fed has done in terms of the economy resetting to this huge increase in interest rates since the beginning of 2022.

15:47Those lags still stare us in the face. And you're seeing the strains already, Melissa. I mean, look at where consumer delinquency rates are going. That was one of the big themes. Nobody talked about it on what the retailers are saying. The retailers are seeing their department store credit card loan delinquency rates are rising inexorably. The bank-wide data that just came out for the last quarter, we've gone up a percentage point in the past year to 2.8 % on delinquency rates on credit cards. and 20 percent of the consumption growth in the past year was funded by credit cards over and beyond what the lagged impact of the fiscal stimulus did.

16:25So I think we're going to be in for some very challenging times for the 70 percent chunk of the economy called the consumer. And I think that was one of the telling aspects of what almost every retailer had to say in the past week is the negative guidance. That to me really stood out. Rosie, the bull case and the bulls will say, well, wait a second, the U.S. consumer in terms of his or her home had ample time to refinance. Most of them did. So the interest rate move doesn't really have the same effect that it would if it, you know, in a different cycle. Thoughts on that? Yeah, I think that that's a very static, I would say, economists would call it a partial equilibrium look at the economy, that they say that all these homeowners have locked in and they're not going to suffer any debt service impairment.

17:13For one thing, that much is true in the mortgage side, but a lot of the non-mortgage debt. And remember, consumer credit cards roll over almost immediately. You know, that's over a trillion dollars now of outstanding. That's a red flag. So you're right on the mortgages, but there's other forms of consumer loans. But at the same time, the big impact is going to be what interest rates do to business investment. Once again, everybody says, well, look at the corporate sector. They've all termed out their debt, too. Nothing to worry about. No ma. They basically termed out their debt. That's not the point.

17:48When you raise interest rates 500 basis points in a little more than a year, what you've done to the business sector is totally altered the decision to embark on a major capital spending project. Because you're a CEO or CFO, and you're doing the calculation of the, say, the a priori expected return on investment benchmarked against your cost of capital. Well, that cost of capital just changed dramatically. So the impact this is going to have on investment and then on employment, and then the impact is going to be on incomes. And that's really where the impact of interest rates, it's not on debt service impairment.

18:29The debt service impairment is going to come from what the interest rates do to investment and employment, and then what that does to cash flows. So all these people that say, oh, don't worry, everybody's locked in. They're not looking at the right element of where the interest rates impact the economy. David, great to speak with you, as always. Appreciate it. David Rosenberg of Rosenberg Research. I think that's an interesting look at debt and the argument that consumers are OK because they've got the 3 percent mortgage and they're locked in. Yeah. And and corporates with floating rate debt, too, are paying a lot more.

19:05That's going to hit margins. and he's right to talk about the sequencing of this market. I just think no one has been able to really make a call on just how this was going to continue to roll out. I don't think there's any question we haven't begun to see the consumer fight. And therefore, it's really just been about where in the market you want to be. It's setting up for a place to really want to own health care, which is going to go into this period after having been underappreciated and certainly we know what the headwinds are for it right now. So I think it's an interesting time to start adding or building those positions.

19:36So defensive. Yeah, well, it's funny. I mean, here we are. And Tim had a great call into Jackson Hole last week on the broader market. OK. And, you know, I was saying to you guys earlier today, I mean, I just wasn't seeing it. I just wasn't seeing it. You think about the leading indicators and all this stuff we're seeing about consumer and consumer credit and everything like that. But the market's not trading off of any of that. And so it's now it's like bad economic news or slower. You know what I mean? Like the pace of so it seems good for the market. Rates have come in a little bit. I mean, the S &P feels like it wants to take out those July highs and make a run right for the January 2022 all-time highs.

20:08And so nothing that they throw out this market seems to make any sense. We haven't even had a 10 % peak to drop decline that would have, I think, got a lot of people more comfortable about the multiple they were paying, given the headwinds, that sort of thing. So to me, it's funny. I come into September, and I need a nice long weekend here because I don't know how well I'm seeing things. But I just don't see anything that could take it down. There you go, people. There it is. I mean, I'm just saying, think about it. Think about the way we broke out of that 43-50 level, okay? And then we ran, and then we checked back, and now it seems like we're going to take out those highs or whatever.

20:42I don't know. What's going to do it, Mel? You tell me. Are you out of your shorts? All your shorts? Are you? Nah, I mean, most of them, yeah. I mean, like, it's been a hard trade. You know, even in a month like August, it was down. I mean, we closed the month down, and it didn't feel like it did it when it came back at the end of this month. So it's just, you know, I mean, it feels like they just want to rip them. All right. Coming up, we're taking a deep dive into Broadcom's earnings. That's stock on the move. After reporting results, the details from the quarter next, plus two very different market moves.

21:08Crude cruising higher as Bitcoin's recent rally seems to fizzle out. The reasons behind that action ahead don't go anywhere. Much more Fast Money in two.

21:27Welcome back to Fast Money. We've got an earnings alert for you on Broadcom. The chip company beating on the top and the bottom lines. Christina Parts and Nevelis joins us with a deep dive into the quarter. Christina. Well, it takes a lot to impress investors these days, especially after NVIDIA's earnings beat last week. But chipmaker Broadcom's inline Q4 guidance is failing to impress right now. Shares are down 3.5%. The company does have direct exposure to the artificial intelligence CapEx push with its Ethernet and custom silicon chips. And much of last quarter's demand actually came from hyperscaler customers building out their AI infrastructures.

21:58CEO Hawk Tan said on the earnings call underway just now that Q3 networking, which includes that AI business, now encompasses 40 percent of total semi-revenue. But that's not all of Broadcom's entire business. It's still exposed to other end market segments that are going through what he calls a soft landing, like the wireless business, which he says is stable, and its server storage business, which in Q4 should be down double digits year over year. And if you exclude generative AI out of the equation, Hawk 10 expects semiconductor revenue to actually be flat in Q4. So the call is underway. He just finished saying that he expects the VM acquisition, VMware, I should say acquisition, to close by October 30th.

22:38Shares, though, still down three and a half percent. But earlier, it closed at a 52-week high. Still an AI darling. Alyssa? All right. Christina, thanks. Christina, Parts Nebulus. Is it a darling guy? Should be. K-Parts broke it down, but people look at it,$900 stock, it must be expensive. Wrong. It trades at 20 times next year's numbers. It's actually extraordinarily reasonable. The price tag, the sticker stock scares you, but don't get fooled by that, number one. And it's amazing. Market give it, the market take it away. All time high today, it's giving the entire thing back. It shouldn't. I mean, this stock is deserved of a higher multiple, but people are not nearly as excited about this stock, which is reasonable, as opposed to NVIDIA, which to me is a little expensive.

23:19Yeah, the network, excuse me, the momentum in cloud is really driving spending and networking. And that's kind of where you're seeing it. The VMware deal is creative. And they also have pointed out that they're still giving back significant amounts of free cash flow to investors. So it's not as if they're in necessarily high investment mode or acquisition mode. So I tend to agree. I mean, there was no way they were going to. Everybody expected this to be a beaten race. And this is kind of what they gave. And after the run in the stock, it's going to pull back. But I think you're buying the weakness.