Tennessee suit accuses Dollar General execs of lying to stockholders

Goodlettsville-based Dollar General’s legal troubles continue to grow following settlements with several states over widespread store mismanagement.

On March 26, a new shareholder-derivative lawsuit was filed in Davidson County Chancery Court on behalf of all shareholders against the discount retailer’s executives and board members. The complaint by shareholder Steve Southwell seeks to reorganize the company’s leadership and order repayment of millions of dollars in executives’ salaries and bonuses awarded amid “breaches of fiduciary duties, insider trading, unjust enrichment, and waste of corporate assets.”

On Nov. 30, 2023, shareholder-rights attorneys Robbins LLP filed a similar suit in the Nashville division of the US District Court for the Middle District of Tennessee. It is not clear if this case replaces the previous claim.

Attorneys Jonathan L. Bobbit of Franklin and Johnson Fistel LLP of Marietta, Georgia, are litigating this matter on behalf of Southwell and other shareholders.

What are Dollar General executives accused of?

The lawsuit alleges company executives and board members conspired to artificially boost Dollar General’s stock, which rose from $122 a share in May 2018 to $262 in April 2022.

The increase did not reflect the company’s true value because chronic understaffing and huge inefficiencies in product management created large losses, the complaint alleges.

“Unbeknownst to investors, Dollar General’s exceptional financial performance was the result of an unsustainable and fraudulent scheme,” the lawsuit states.

Specifically, tens of millions of dollars of Dollar General merchandise was stolen, destroyed or unsellable and stores often boosted profits by charging customers more for items than their advertised prices.

Last year, Dollar General settled lawsuits with Ohio, New Jersey, Vermont and Wisconsin among other disputes over safety violations, understaffing and overcharging customers.

“Dollar General’s massive inventory problems and illegal pricing scheme were the subject of multiple federal and state investigations, resulting in multi-million-dollar fines,” the lawsuit states. “While the individual defendants would have been well aware that Dollar General’s inventory issues and pricing scheme were rapidly degrading the company’s financial outlook, they made sure the investing public remained in the dark.”

Harsh headwinds for discount retailers

The discount retailer, which was founded in 1955, faces rough headwinds from its legal challenges, intense competition, excessive amounts of stolen or damaged inventory and inflation.

Dollar General is not alone in these hard times for low-cost goods sellers who compete with Walmart. The formerly under-$1 retail chain Dollar Tree announced in an earnings call this month that its price range is now $1.50 to $7 per item.

But despite the immediate economic challenges, “America’s neighborhood general store” is aggressively expanding and revamping its operations. It celebrated the opening of its 20,000th store in February and expects to open 800 stores this year while increasing fresh produce and grocery offerings, including strategies to increase the freshness of its food.

“Our customers continue to feel constrained in the current macroeconomic environment, and accordingly we expect their spending to continue to be pressured,” the company’s February Form 10-K report states. “We believe our convenient store formats, locations, and broad selection of high-quality products at compelling values ​​have driven our substantial growth and financial success.”

What does the lawsuit say?

Here are some main points in the new lawsuit against Dollar General being litigated in Davidson County:

• The company’s problems were announced in a February 2023 earnings statement, resulting in an immediate 4.89% stock decline, or $4.2 billion in market capitalization: “As a result of the foregoing, Dollar General has suffered, is suffering, and will continue to suffer significantly financial and reputational harm.”
• Between 2012 and 2022, the company increased its store count by more than 84%, from 10,662 locations to more than 19,000 locations.
• “Between 2012 and 2022, Dollar General’s net sales rose at a compound annual growth rate of 9%, while earnings per share grew at a CAGR of 14%. This in turn, drove the price of Dollar General stock up by more than 40% . Unbeknownst to investors, however, Dollar General’s exceptional financial performance was the result of an unsustainable and fraudulent scheme.”
• “Specifically, the Individual Defendants caused Dollar General to chronically understaff its stores and declined to remedy known logistical problems and other significant operational difficulties. These actions led to a rapid buildup of unwanted inventory, the destruction and loss of tens of millions of dollars’ worth of store merchandise, the mispricing of items, and the systemic overcharging of Dollar General’s customers at checkout above the price listed on the shelf.”
• Defendants include former CEO Todd J. Vasos; former COO and CEO Jeffery C. Owen; former CFO John W. Garratt; CFO Kelly M. Dilts; Board Chairman Michael M. Calbert; board member Warren F. Bryant; board member Ana M. Chadwick; board member Patricia D. Fili-Krushel; board member Timothy I. McGuire; board member Debra A. Sandler; board member Ralph Santana; board member David Rowland; and former board member William C. Rhodes.
• “The individual defendants either benefited financially from the improper conduct, or received bonuses, stock options, or similar compensation from Dollar General that was tied to the performance or artificially inflated valuation of Dollar General, or received compensation that was unjust in light of the Individual Defendants’ bad faith conduct.”
• “Additionally, the Individual Defendants knowingly limited store labor hours in a manner which placed employees in situations where the assigned tasks could not possibly be completed within the allotted time.”