The books are now closed on the first quarter, but it will be a few weeks more before we start to see whether it was as good a period for corporate profits as it was for investors, who were able to celebrate a 10 percent rally in the S&P 500 – and earn even more from some stocks that, as recently as last fall, were being widely dismissed, such as Netflix (NASDAQ: NFLX) and yes, even Best Buy (NYSE: BBY).
The story of the market so far in 2013 can’t be reduced to anything as simple as a tale of two stocks, but taking a side-by-side look at an unexpected winner and one of the first quarter’s worst performers may shed some light on where we are and the factors likely to affect how stocks perform going forward.
The laggard, of course, is Apple (NASDAQ: AAPL): Over the last 12 months, this is a company that has gone from the “must own” stock without which it was impossible for any portfolio to beat the S&P 500 or other market index to a toxic drain on performance. The strong performer comes from the other side of the tracks: Dollar General (NYSE: DG), the discount retailer that has managed to post a year-to-date gain of 14 percent, a dramatic contrast to the 21.8 percent first-quarter plunge in Apple’s share price.
On the surface, it would seem much more logical if this performance were reversed. After all, it is Apple that sells the high-margin electronic gadgets that still have more cachet than pretty much anything else on the market. Meanwhile, Dollar General is the home of Cambodian-made cheap cotton goods and discount-priced cereal, and its managers squeeze out tiny margins on each item sold with as much care as its target customers use in stretching their budgets over the course of the month. No one proudly displays plastic bags with the Dollar General logo as a kind of status symbol.
But there are enough Americans who shop at Dollar General – and who remain very focused on just how every dollar is spent – for the retailer to have seen its growth picture improve. Most recently, for instance, it announced an 11 percent jump in earnings for the quarter ended January 2013, better than analysts had anticipated. Oddly, it is shifting its product mix in such a way as to put more emphasis on lower-margin consumable goods. But there is method in its apparent madness: While each individual can of soup or box of cereal may command a lower margin than a more durable item, shoppers keep needing more of them. They can postpone the decision to replace their television set, buy new towels or even a new smartphone, but not food purchases. To the extent that Dollar General can offer discount pricing and a one-stop shopping experience, it can increase the transaction amount per shopper per visit. Combined with a ruthless focus on keeping costs low, that is likely to translate into further growth in profits over the course of 2013.
Where Dollar General makes a virtue of its lack of status and celebrity, Apple finally is experiencing the fallout from its own runaway success, as well as some of the same factors that are now contributing to Dollar General’s wellbeing. Margins have fallen, and the company is suffering from what some of its critics believe to be a lack of innovation. While it’s premature to decide that Apple has lost its mojo – its brand certainly remains robust even if its share price is floundering – the company faces some headwinds, notably the power of the Android platform.
Of potentially greater significance is the fact that many of us who want to own an iPhone, an iPad or other device already do so, and the replacement cycle for smartphones is very different from that for breakfast cereal. To get customers to keep buying, Apple will have to wow us again and again. Plus, like those budget shoppers who flock to Dollar General, we’re always looking for bargains and Apple just doesn’t offer any. Their products don’t go on sale, and if you want an iPhone you need to be prepared to sign up for a costly monthly plan, even as Samsung offers a wider array of Android-based smartphones aimed at different parts of the market.
Can Apple continue to grow without finding a way to appeal to the budget-conscious members of our society? It’s possible -- but only if it can innovate more dramatically that it has done of late. (Those who waited to hop aboard the tablet bandwagon and who focus as much or more on value as on brand name may be more willing to own a Kindle Fire than to pay up for an iPad mini, for instance.) Dollar General is well aware of what kind of company it is, its target audience and how to serve them better: its version of innovation, for instance, is to add tobacco products to the list of goods available in its stores. Apple, however, is a business whose model is caught in between the wariness of non-devotees – why should we pay up just for the brand name and the design, these folks argue? – and a lack of new products to appeal to its fans.
The bottom line? Small margins can be good enough, as long as they are growing, as Dollar General has demonstrated, while a lofty brand image may not be enough to outweigh a desire on the part of consumers for value. Dollar General’s managers are unlikely to preside over a dramatic and sweeping change in the nature of their business in the way that Steve Jobs did at Apple following the launch of the iPad, of course. So Dollar General isn’t likely to see its stock price take off for the stratosphere any time soon. But the odds favor the retailer continuing to generate solid gains in profits and an improvement in its return on equity for investors.
Meanwhile, owning Apple remains much more of a gamble. You may not want to sell its stock short in the wake of the big selloff -- that would be betting that the company’s innovators have no smart ideas up their sleeves. On the other hand, Apple may be struggling to acknowledge that consumers won’t automatically continue to line up to celebrate every new product launch simply because it’s another Apple. If it could learn one lesson from Dollar General -- the importance of being seen to offer not just design and pizzazz, but value -- then the company’s malaise could vanish.