Investors were euphoric when Dollar General brought back its former CEO less than a year after his retirement. A sober look at the situation reveals significant concerns.
On October 12, Dollar General announced the return of Todd Vasos as Chief Executive Officer. Mr. Vasos previously served as CEO from June 2015 to November 2022. The news came after the close of trading on a day when Dollar General’s stock closed at $101.83, down 61% from its 52 week high, and settling at levels last seen in 2018. The news was greeted with enthusiastic applause by investors and traders the following day with the stock closing up 9.2%. The rally has continued this week with the stock trading at $117 this morning.
Mr. Vasos was 61 years old at the date of the company’s most recent proxy statement released on April 11. According to the press release, he has agreed to return for the “foreseeable future.” Mr. Vasos replaces Jeff Owen, a Dollar General veteran with nearly thirty years of experience who previously served as Chief Operating Officer reporting to Mr. Vasos. Mr. Owen was 53 years old at the date of the proxy. Mr. Owen resigned from the board and left the company upon his dismissal as CEO.
The press release provided little context for firing Mr. Owen, but the board clearly lost confidence in his leadership based on this brief excerpt:
“The Board has tremendous respect for Jeff and greatly appreciates his many contributions to the Company, especially during his long tenure leading our retail operations,” said Michael Calbert, Chairman of Dollar General’s Board of Directors. “However, at this time the Board has determined that a change in leadership is necessary to restore stability and confidence in the Company moving forward.”
At the end of the release, the company provided updated guidance for its fiscal year. Same-store sales are now expected to range from a decline of 1% to 0% compared to previous guidance of a decline of 1% to growth of 1%. Diluted earnings per share is expected to range from $7.10 to $7.60 compared to previous guidance of $7.10 to $8.30. It is reasonable to believe that the company’s stock would have declined if the updated guidance had been released without the dramatic news of a leadership change.
I have been following Dollar General since the company announced poor quarterly results in late August that sent its stock diving to the $130 level. I followed up my initial analysis with a visit to a Dollar General and Family Dollar location last month.
The following articles provide my recent thoughts on the company’s situation:
Dollar General: Value or Value Trap, September 4, 2023
There’s Always a Reason, September 21, 2023
My initial reaction when I read the news release was that this abrupt management change signaled bad news for Dollar General.
As discussed in my earlier articles, bulls and bears have been arguing about whether Dollar General’s recent woes are due to macroeconomic factors or company-specific miscues. If the problems are mostly macroeconomic in nature, it is reasonable to believe that Dollar General will weather the cyclical storm given its long history and scale of operations. On the other hand, company-specific problems could be harder to remedy and result in long term impairment of earnings power and a lower valuation.
The firing of Mr. Owen makes it clear that the board either believes the problems are company-specific or made the change to do something dramatic to counter the effect of lowering guidance. But for now let’s give the board the benefit of the doubt and assume that they were not acting in order to boost the stock price in the short run.
The press release refers to “restoring stability and confidence.” It seems to me that problems of a primarily macroeconomic nature should not logically cause the board’s confidence to plummet to the point where they must fire a CEO with three decades of experience at the company who has been in the top job less than a year.
The more ominous concern is the possibility that Dollar General’s underlying strategy is so fragile that it can be seriously damaged by a new CEO in just a few quarters. If bringing back the prior CEO is meant to “restore stability and confidence” in the company, it follows that Mr. Owen was able to cause instability and loss of confidence in less than a year! If this logic holds, it points to a potentially fragile business model.
Continuity or a New Direction?
Is it reasonable to believe that the selection of Mr. Owen as CEO in November 2022 represented continuity or a new direction for Dollar General?
On July 12, 2022, the company announced its CEO succession plan in a press release. Mr. Vasos would retire as CEO effective November 1, 2022 and transition into a senior advisory position through April 1, 2023 at which point he would enter into a two year consulting agreement with the company. Mr. Vasos was also expected to retain his seat on the board of directors following his retirement.
Dollar General’s Chairman expressed hopes that the “strong trajectory” established by Mr. Vasos would continue under Mr. Owen’s leadership. Mr. Owen made the following statement:
“I am deeply honored to have the opportunity to build on Todd’s incredible tenure as CEO. I am equally humbled to lead Dollar General as we continue to serve our customers with value and convenience, support the communities we proudly call home and provide our employees with career and growth opportunities,” said Owen. “For the past three decades, I’ve grown and developed within our Company, and I couldn’t be prouder to serve as CEO alongside an amazing team in our stores, distribution centers, private fleet and Store Support Center.”
Every statement made by the company, its Chairman, and the incoming CEO seems to indicate that the transition was to be one of continuity rather than a strategic shift. This impression is bolstered by the continuing presence of Mr. Vasos in advisory roles as well as on the company’s board. Mr. Owen was added to the board on November 1 when he assumed the CEO position.
The situation is clear: Dollar General’s overall strategic posture established under Mr. Vasos would continue under Mr. Owen’s leadership with Mr. Vasos assisting in the transition and remaining available in an advisory role. Presumably, if the company ran into trouble, Mr. Vasos would provide his counsel to Mr. Owen and the board. Otherwise, there would be no point in his continuing presence at the company.
As Dollar General encountered problems in 2023, it should be assumed that Mr. Vasos did provide feedback in his dual roles as a consultant and member of the board. Whether this advice was welcomed by Mr. Owen is not knowable from an outside perspective, but there is nothing in the public statements of the company to indicate that a major strategic shift was made. If the company’s troubles in 2023 were due to strategic miscues, much of the blame must logically be attributed to Mr. Vasos.
Compensation Issues
What’s a few million dollars when you’re talking about a company with a market capitalization of ~$25 billion? Perhaps this is the reason for the lack of any meaningful media coverage of compensation issues. However, the incentive structure for top executives is of utmost importance. Compensation matters also have a major bearing on a company’s culture and its perception in the community it serves.
Dollar General filed a 8-K on October 12 which includes compensation details for Mr. Vasos. A brief summary of his compensation is as follows:
- $1.4 million base salary
- Cash incentive bonus with a targeted payout of 150% of base salary
- Option for 250,000 shares with a strike price equal to the closing price on the date of the grant with options scheduled to vest on October 12, 2027, indicating a grant date of October 12, 2023. This indicates a strike price of $101.83.
- Reimbursement of up to $500,000 per calendar year “for personal air travel to and from his residences and for personal visits with his immediate family members in locations within the continental United States”
In the event of termination “without cause” or if Mr. Vasos resigns for “good reason”, he will receive severance benefits as follows:
- Continued base salary payments over 24 months.
- Lump sum payment equal to two times his annual target bonus.
- Lump sum payment of a pro-rata portion of the annual bonus he would have been entitled to receive for the fiscal year of termination.
- Lump sum payment equal to two times the annual contribution that would have been made by the company for medical, pharmacy, dental, and vision programs.
- Outplacement services for one year after termination.
The option grant is the most egregious aspect of the compensation agreement.
When Mr. Vasos retired on October 31, 2022, Dollar General’s stock closed at $255.05. The new grant of 250,000 options at a strike price of $101.83 means that if Dollar General’s stock price merely returns to the level it traded at when Mr. Vasos retired in 2022, he will be in the money by approximately $38.3 million.
The employment agreement provides Mr. Vasos with significant guaranteed cash compensation along with generous severance benefits. In addition, he stands to earn tens of millions of dollars merely by achieving a stock price no higher than when he retired. It does not appear that any level of accountability exists regarding his role in the strategic errors that led to the company’s troubles in 2023.
Meanwhile, it is highly unlikely that Mr. Owen’s firing falls under the definition of termination “for cause” which is quite restrictive. Accordingly, Mr. Owen will receive the rich severance payments outlined in his employment agreement which roughly mirrors the termination benefits outlined above for Mr. Vasos.
Shareholders who have suffered from the miscues of management over the past year, overseen by the board of directors, now find themselves holding a pummeled stock while effectively paying compensation for both CEOs over the term of Mr. Owen’s two year severance. To add insult to injury, shareholders will suffer dilution of 250,000 shares and Mr. Vasos stands to gain tens of millions of dollars if he’s successful in merely restoring the stock price to where it traded when he departed last year.
Conclusion
No one has suggested that Jeff Owen committed any misconduct or was incompetent. As a thirty-year company veteran who previously served as Chief Operating Officer, Mr. Owen clearly knew the company well and had the confidence of Mr. Vasos and the board just a few quarters ago. If his actions truly caused a loss of confidence or instability in the business in less than a year, it is hard to argue that Dollar General’s underlying business model is robust. It should take more than a few quarters of less than inspired leadership to impair a great business.
It is possible that boardroom dynamics played a role in Mr. Owen’s firing. Perhaps he resisted taking the advice offered by Mr. Vasos and lost confidence in the board as a result. It is not ideal for a new CEO to be second guessed by the former CEO in the boardroom. It is possible that Mr. Vasos was retained by the board and placed in an advisory role because members were not confident in Mr. Owen. However, this scenario also raises serious corporate governance concerns.
While the board ultimately bears responsibility for hiring Mr. Owen, the role of a CEO includes building a strong bench of executives who could take over at a moment’s notice. Mr. Vasos had the responsibility to cultivate a team of executives who could step in to run the company if he was suddenly incapacitated. Accordingly, he also bears part of the responsibility for Mr. Owen’s tenure.
Given the overall situation, shareholders must also consider whether the board decided to make a dramatic move in order to distract attention from a weak quarter. If the updated guidance had been provided absent any change in management or other context, the stock price would have likely declined last week. Obviously, if this was the motivation, shareholders should also be concerned since a management change should not be made simply to boost the stock price.
In my opinion, the combination of the company effectively admitting that strategic errors are behind recent poor performance, the seemingly reactive management change, and an egregious compensation package should lead to skepticism about the company’s near-term prospects as well as its long-term direction.
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No position in Dollar General.