Dollar General Faces Tough Times, Yet Growth Signs Emerge
Dollar General (NYSE: DG) has seen a steep decline in its stock price, plummeting approximately 71% since its peak in late 2022. While the company contends with significant challenges, it continues to grow and may be finding ways to improve its performance. Is Wall Street too negative at this juncture after having been overly optimistic a few years back?
Here‘s why it may be a good time to consider taking a position in Dollar General’s stock.
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Overview of Dollar General
As a retailer, Dollar General holds a distinct position within its sector. It offers a variety of everyday items at price points that are accessible for consumers. Its target demographic primarily includes lower-income shoppers, which adds to its market appeal. A key differentiator is its strategic store placement.
Image source: Getty Images.
Dollar General specifically targets rural locations where competition from bigger brands like Walmart and Target is limited. Smaller store formats allow it to thrive even in areas with fewer residents, making quick shopping trips more convenient for its customers. Currently, Dollar General operates over 20,500 stores in the United States and Mexico.
Interestingly, there is a dichotomy in its offerings. The retailer primarily sells necessities like toiletries but also includes higher-margin items such as clothing and home goods. In recent years, it has shifted focus towards higher-margin, non-essential products. However, sales for these items have lagged compared to necessities, affecting profits. Despite this, the decision to prioritize customer needs may prove strategic, even with lower short-term margins.
Current Developments in Dollar General’s Stock
Wall Street’s enthusiasm for dollar stores surged in recent years but has since cooled. Analysts noted that higher-income consumers were shifting towards dollar stores, which boosted sales temporarily. However, as this trend faded, so too did the stock prices. Competitor Dollar Tree (NASDAQ: DLTR) has similarly suffered from this industry-wide trend.
DG data by YCharts
Today, Dollar General’s shares have reverted to levels seen in late 2018, a time when it had just about 15,470 stores. In contrast, the company has grown by approximately 33% in store count, now exceeding 20,500 locations. This notable expansion comes amid a mixed financial performance. In fiscal 2023, the fourth quarter saw a net sales drop of 3.4%, while same-store sales increased only by 0.7%. Overall sales for the year rose by 2.2%, but same-store sales grew just 0.2%. Nonetheless, fiscal 2024 is showing signs of improvement, with same-store sales returning to positive territory and net sales benefiting from new store openings.
Overall, it appears Dollar General may be stabilizing by refocusing on core essentials. Investors have heavily penalized the stock, which might now attract contrarian investors. Its size and new store strategy could signal a potential recovery in financial performance. The initial signs of improvement suggest that a turnaround may be imminent.
Evaluating the Risks and Rewards
While Dollar General is not suitable for every investor, particularly given its volatile financial performance and many variables at play, it may be appealing to those willing to adopt a contrarian strategy and a long-term perspective. With its growing number of stores, the potential exists for significant financial improvement.
Should You Invest $1,000 in Dollar General Now?
Before purchasing stock in Dollar General, consider the following:
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Target and Walmart. The Motley Fool has a disclosure policy.
The views expressed in this article are those of the author and do not necessarily reflect the views of Nasdaq, Inc.
