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Could Dollar General Be a Millionaire-Maker Stock?

By James Brumley - May 18, 2021 at 8:50AM

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A closer look makes it clear this discount retailer's next chapter is just as compelling as its previous one.

It would be easy to presume that the best days for Dollar General's (DG 0.86%) stock performance have come and gone. Just a few years back, investors didn't fully appreciate the dollar store industry's potential, and this particular chain navigated its opportunity well. For instance, shoppers liked initiatives such as the addition of fresh produce.

But Wall Street has now had some time to weigh -- and price in -- the company's likely growth. Never even mind the fact that last year's sales surge is a tough act to follow and a new CEO may be taking the helm in the near future.

Such doubts are reasonable, but they may ultimately be short-sighted. While Dollar General stock may not be able to dish out the same 119% gain it's logged in the past five years over the course of the coming five years, this pick is still one of the better names in the business.

A Dollar General shopping basket held by customer looking at fresh produce.

Image source: Dollar General.

New and improved

Even if you're not a regular shopper you're likely familiar with the company. Dollar General operates 17,266 stores in 46 states, putting at least one of its locales within five miles for 75% of Americans. Conversely, 75% of its stores serve communities with populations of less than 20,000. Often the only discount retailer in its market, the company's been accused of charging above-average prices to rural customers who earn below-average wages.

The claims are understandable even if debatable. But they're also increasingly irrelevant to investors, as Dollar General's next five years will look notably different than the previous five -- for a lot of reasons.

Chief among them is a deeper foray into perishable groceries, supported by bigger and better-equipped stores. The organization intends to open on the order of 1,000 new stores this year with an average square footage of 9,000. This larger footprint will accommodate more coolers and produce. To this end, Dollar General plans on bringing produce to another 700 locales this year, bringing the tally up to more than 1,800 stores.

And that's just this year. Give the company more time, and it will look more like a traditional grocer. With greater scale, the retailer may be able to offer prices more in line with conventional grocers like Kroger.

More fresh foods aren't the only new items Dollar General shoppers will be seeing this year, however. Roughly 5,700 stores will begin to participate in the company's Non-Consumables Initiative (NCI), bringing more home goods, bathroom items, kitchen wares, party supplies, and more into the mix. This effort will more than double the number of locations involved in the NCI, widening the stores' appeal to a larger audience that had been looking elsewhere for such items.

Dollar General isn't stopping there, however. The retailer is also taking a dramatic step outside of its rural, lower-income market comfort zone to address larger and more affluent markets.

The checkout desk of Dollar General's new concept store popshelf is shown

The checkout desk at a popshelf concept store. Image source: Dollar General.

Its new concept store is called popshelf. The company unveiled the concept in October, explaining this new brand of stores will still offer value-priced goods, but will feature more discretionary inventory like home decor, seasonal items, party and entertainment supplies, health and beauty products, and more. Most notably, popshelf stores will be established in more suburban areas where the average annual household income falls somewhere between $50,000 and $125,000.

That's a big switch from Dollar General's typical rural customer living in a home that brings in on the order of $40,000 per year. As such, the venture promises to bring organic growth to the table without cannibalizing the company's existing sales footprint.

Convenience is the key

Then there's the external dynamic in play: Convenience has eclipsed product selection as a key criteria consumers consider when choosing where to shop. As a Deloitte analyst noted in the middle of last year, "The vast majority of stores that opened in the last 10 years were dollar stores (46%), convenience stores (25%), and drug stores (16%)," adding, "One common trend among these smaller stores is that they're moving closer -- both in terms of location and inventories -- to the consumer."

It's not just dollar and drug stores anymore either. A slew of big-box retailers and specialty brands have also taken consumers' pulse and come to a similar conclusion. Grocery store chain Meijer, Nike, Nordstrom, Walgreens, and Target are just some of the consumer-facing companies that within just the past few months have initiated or amped the development of small-format stores closer to where people live and/or work.

Dollar General was already a small-format retailer, for the record. Indeed, its newer stores will be bigger than its older ones yet will still remain relatively small by retailing standards. It's encouraging nonetheless that the retailer is already offering more of what shoppers want where they want to buy it.

To this end, analysts certainly see these initiatives driving real growth once this year's post-pandemic lull is in the rearview mirror and the economy is fully reopened.

Dollar General's top and bottom lines should grow through 2026 on new initiatives.

Data source: Thomson Reuters. Chart by author.

Bottom line

Connect the dots. This isn't a retailer that's merely looking to expand by doing more of what worked in the past. The company's growth plans are distinctly different than its prior growth plans, which largely focused on avoiding direct competition with bigger players like Walmart. The company's now adding new, well-thought-out products while widening its appeal to a whole new demographic.

Yes, Dollar General is a buy, and yes, given enough time it could even be a key reason a stock holder's portfolio gets over the million-dollar hump.

James Brumley has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Nike. The Motley Fool has a disclosure policy.

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