Sunday, December 11, 2016

If You Really Care About The Poor

I'm not much of a stock picker. Indeed, my ability to predict the future is not very good -- though probably better than Jeff Mackler's or Christine Frank's ability to forecast the weather 100 years from now. Still, if you want a get rich quick scheme you're reading the wrong blog.

Nevertheless, I do have a stock pick for you. It comes more under the socially responsible investing label than a road to riches. If I ever do take my own advice it's because I'm a sucker for a sob story.

Much has been said about how the economic bottom half of Americans are doing poorly. Trump ran his election campaign precisely on that premise, promising that he'd improve their lives. I doubt he'll be able to deliver.

I, for one, don't believe that the pain is as bad as Mr. Trump makes it sound -- I think most Americans are getting richer. And for those who really are falling deeper into poverty, it is to some extent their own "fault"--that last word in scare quotes because I certainly don't mean it too literally. But the fact is that among poor people, household size has been getting smaller due to divorce and/or never getting married in the first place. And some personal habits (drug addiction, sugary diet) are leading to poor health. All of these work against the larger trend of increasing wealth for most Americans.

Still, whatever the cause, there is no question some considerable number of our fellow citizens are not doing very well. Somebody needs to help them out.

The hero of the day is an unlikely fellow by the name of Todd Vasos. He's hardly self-sacrificing--his paycheck is over $925,000 annually, on top of which he gets stock options bringing his "total calculated compensation" for 2015 to just shy of $9 million.

Or, put another way, if his salary was divided among the 120,000 people who work for him, they'd each get a $75 bonus for Christmas. So it's not as though everybody else is poor because he's so rich.

Mr. Vasos is the CEO of Dollar General (DG), a company that sells about $20 billion worth of product annually, or about 2,200 times Mr. Vasos' compensation. The company's operating profit was about $2 billion last year.

Unless you live in the Pacific Northwest you are probably familiar with Dollar General. It's one of those "deep discount" stores that competes with Walmart for the very low-end consumer. I currently live within a mile of a Dollar General store, and drive by two others on my way to work in the morning. This indicates that I don't live in a very wealthy neighborhood. The company's strategy is to sell relatively few, fast-selling, off-brand items at very low prices. I shop there for things like toiletries, cooking supplies, cleaning supplies, and gift cards. They also carry popular food items--mostly packaged goods, but also milk, juices, and ice cream.

Last August the stock price of DG dropped dramatically, along with their competitors, Dollar Tree and Belo Five. ZeroHedge explains why:
Discount retailer Dollar General said it was cutting prices on its most popular items such as bread, eggs and milk, intensifying a price war among already commoditized products with retail giant Wal-Mart Stores to win back falling market share. It shares fell the most on record, plunging by 18% after the company missed on revenue, blaming aggressive competition, lower food prices and reduction in SNAP, or food stamp, coverage in 20 key states.
Perhaps increased competition from a resurgent Walmart is a culprit, but that's not the whole story.
But the biggest factor by far impacting the performance of both dollar stores was the sharp, adverse turn in the purchasing power of the lower half of US consumers. 
Both Dollar General and Dollar Tree said pressures on their core lower-income shoppers contributed to the same-store sales misses that both retailers reported. On today's conference call, Dollar General CEO Todd Vasos said that he was surprised to admit that while on the surface things are supposed to be getting better, the reality is vastly different for low-income US consumers: 
"I know that when we look at globally the overall U.S. population, it seems like things are getting better. But when you really start breaking it down and you look at that core consumer that we serve on the lower economic scale that's out there, that demographic, things have not gotten any better for her, and arguably, they're worse. And they're worse, because rents are accelerating, healthcare is accelerating on her at a very, very rapid clip" (boldface in original).
Let's consider these in turn:
  • Walmart--has hardly been resurging. It's sales are mostly flat, and for the same reasons reported by DG.
  • Higher rents--are happening largely because of local government restrictions on building, especially in states like California and New York. It has become increasingly difficult to build entry-level housing anymore. The cheapest new houses in my region cost north of $400K. Reducing or eliminating zoning laws (as happens in places like Houston) keeps housing prices low.
  • Expensive health care--is mostly because it is way over-regulated. It costs a billion dollars to bring a drug to market these days. Similar restraints exist for medical devices. I understand there's a tradeoff between cost and safety, but we've gone way too far on the way to safety.
  • SNAP & food stamps--are being reduced for all sorts of reasons, including limited state tax revenues, and increased pension costs for state employees.
Note that these problems arise mostly because of government mismanagement. If we had competent civil servants many of these problems could be mitigated. So much for socialism.

So what did DG do about this? "Dollar General, whose product selection prices are already among the lowest in the country, cut prices by 10% on average on about 450 of its best-selling items across 2,200 stores during the quarter, CEO Todd Vasos said on a conference call."

In response to a question from a journalist, Mr. Vasos explained:

Q. I understood the issues with SNAP and deflation, but is there a piece of this that's just related to the consumer job – labor market getting better, so that consumers spending a little bit better and they're trading up? Is that not possible?
Vasos: I am not going to say, it's not possible, but we have not seen that in our data. Once again, remember that over 60% to 65% of our sales and consumer base is on that lower demographic area that – of the economic scale. And when you keep that in mind, her life hasn't gotten any better. And that's really that customer that we're serving the most, and that we're intent on making sure has enough money and enough products inside her house to be able to feed her families.
And the reaction?
And when we're out in stores and we drop prices like we do, I can tell you, I've been out in stores in the middle of the aisle and heard customers come up to our store manager in tears and thanking them for being there and thanking them for the prices that we offer in a real convenient nature for her, where she can walk to the store, because she can't afford anything else. When you hear that, that really brings home where this core customer is.
So there you have it. A multi-millionaire does more to prevent starvation than (probably) all the free food-banks in America. He accomplishes this by running an efficient, self-sustaining business that buys the products as cheap as possible and passes the savings on to their customers--along with paying 120,000 employees.

And my Trotskyist friends are going to complain that the guy earns an exorbitant salary? I think they have their priorities screwed up.

If you're against poverty, buy a 100 shares of Dollar General.

Down with poverty!

ZeroHedge includes this picture of one of Mr. Vasos' customers.
dollar general.jpg (569×398)

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