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Want to Retire Early? Buy Dollar General Stock

By James Brumley – Updated Aug 25, 2021 at 10:07AM

Key Points

  • The discount retailer has mastered the art of operating smaller stores in rural markets.
  • Dollar General has also come up with a way of penetrating less rural, suburban areas without damaging its value-oriented brand name.
  • Loyalty to a particular store chain or website is being chipped away by consumers' quest for convenience and price.

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This quirky, overlooked retailer is proving that bigger isn't necessarily better.

Between the sheer dominance of names like Walmart (WMT -0.10%) and Amazon (AMZN -1.44%), and the so-called retail apocalypse taking shape all around the two powerhouses, it's tough for investors to be excited about owning any other retailer right now.

There is one such name, however, that's managed to sneak into the arena. Indeed, it not only established itself, but it has positioned its stock for above-average growth at below-average risk. That name is discounter Dollar General (DG 3.22%). The stock offers a great way to round out the consumer-facing portion of a retirement portfolio simply because the company is doing what Amazon and Walmart won't -- and can't.

An exterior view of a Dollar General store.

Image source: Dollar General.

Doing everything differently

Don't sweat it if you've never actually seen a Dollar General store. Of the company's 17,426 stores spread across 46 different states, 75% of them are found in towns with populations of 20,000 or less.

That's by design, by the way. The focus on smaller markets means Dollar General typically isn't competing head-to-head with Walmart. And yet, three-fourths of the nation's population still somehow lives within five miles of a Dollar General store.

It would also be amiss to not mention that Dollar General also specifically caters to a rural crowd that typically earns less than their urban counterparts. The specifics vary from one source to the next, but most research suggests the typical Dollar General shopper lives in a household with an annual income of between $40,000 and $50,000. For perspective, Kantar Retail reports Walmart-shopping households earn, on average, about $76,000 per year, and it estimates the typical Amazon customer is from a household earning a little more than $84,000 per year.

Chief among the accommodations Dollar General makes for these demographic differences is lower price points made possible by smaller package sizes. Much of the inventory found on Dollar General's stores' shelves is also higher-margin, private-label goods.

Amazon and Walmart could mirror Dollar General's tactic. But, both companies already operate huge stores and warehouses, crowded with lots of other goods; the average Walmart covers 100,000-plus square feet of shopping space. Adding more products to the mix may only prove overwhelming to their shoppers. There's much to be said for Dollar General's smaller store footprints of only around 7,400 square feet, which inherently limits how many items the retailer can even try to carry.

Built for evolving consumer preferences

There's another, more nuanced reason Dollar General is likely to outgrow its rivals for retirement-minded investors in the years ahead though -- convenience. And not just for rural consumers with below-average incomes.

There was a time not too long ago when a certain echelon of consumers wouldn't step foot in a Dollar General store even if they had to drive past one en route to Walmart. A funny trend reached a tipping point around the time of 2008's subprime mortgage meltdown and subsequent recession, however. That is, most consumers ceased caring about where they shopped and started caring more about getting what they wanted with relative ease at the best price. Even when they didn't have to, a bunch of these shoppers stuck with Dollar General, choosing not to traverse an entire Walmart store just to grab one or two items.

The idea has clearly worked, with Dollar General's store count more than doubling since 2009, driving even greater revenue growth.

Bar chart showing Dollar General's revenue growth streak from Q2 2016 to Q4 2023.

Data source: Thomson Reuters. Chart by author.

The stock's price is up big-time too, higher by 155% over the past five years, and up more than 600% over the past decade. Dollar General's plan to keep its stock moving at this sort of pace is simple enough. Now the company is looking to bring its convenience and value to more urban, higher-income markets it's largely left unaddressed so far.

To do that, Dollar General is rolling out something called popshelf. Unveiled in October 2020, popshelf promises a few more discretionary offerings -- like home decor and party goods -- than you'll usually find in a Dollar General store. There's still plenty of value to be had though, as 95% of popshelf's merchandise will be priced at $5 or less.

What's most notable about the new store concept, however, is that it's being aimed at larger suburban markets where the typical household earns between $50,000 to $125,000 per year. These consumers don't want to needlessly walk around a huge store just to grab a few items any more than any other consumer from another income bracket does. And they won't have to. The average popshelf store is still only going to be around 9,000 square feet.

There are only around 20 popshelf stores up and running right now, so don't look for game-changing growth just yet. But, in that the company's now got something that will work in markets where Walmarts may already be established, popshelf has lots of room to grow without cannibalizing its core discount retail business. In the meantime, the company's finding success in introducing popshelf shops within Dollar General branded stores.

A chackout stand for the popshelf shopping concept sits in the middle of a Dollar General store

Image source: Dollar General.

Connecting the dots

Don't misread the message: Walmart is still formidable competition. And the longer Amazon exists, the more regular customers it adds to its base. Also bear in mind Dollar General is a growth investment best-suited for working investors looking to build a retirement nest egg; retirees looking for income right now will be disappointed by Dollar General's paltry dividend yield of 0.7%.

But, what a brilliant balance of growth and consistent performance this name offers for the long haul! Dollar General is perfectly capitalizing on its differences with other retailers, developing a loyal base of its own customers that Amazon and Walmart just aren't quite connecting with.

Sure, with thousands of stores already up and running, saturation is always a concern. Recent Census Bureau data says there are nearly 19,500 cities in the United States. Fewer than 800 of them sport populations of more than 50,000, while roughly 14,800 of them are made up of less than 5,000 people. That only leaves around 4,000 cities in a sweet spot that's not too big nor too small; and remember, there are already over 17,000 established Dollar General stores.

If you look closely though, it's not unusual for a small town to support two or even three stores. It's also worth mentioning Pew Research estimates around half of the country's population now lives in the suburbs where popshelf may eventually become a fixture. Cannibalization isn't going to be an issue for a long while.

Bottom line? Dollar General is a worthy retirement investment because the company's figured out how to operate small stores in small markets with a small amount of inventory, yet produce big growth for investors. The model works and looks like it will for years to come.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. James Brumley has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool recommends the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. The Motley Fool has a disclosure policy.

Stocks Mentioned

Dollar General Stock Quote
Dollar General
$243.96 (3.22%) $7.62 Stock Quote
$94.13 (-1.44%) $-1.37
Walmart Stock Quote
$153.22 (-0.10%) $0.15

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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