Dollar General (DG -0.59%) share prices are well down for the past few weeks, and not surprisingly so. In addition to so-so quarterly results from its discount-retailing peers, Dollar General itself posted relatively disappointing preliminary Q4 results late last month. Same-store sales growth likely rolled in closer to 5.7% for the three-month stretch ending in early February, versus the company's previous guidance for growth of between 6% and 7%.
The stock's steep pullback, however, is ultimately a buying opportunity. And if you're going to capitalize on the opportunity, you might want to do so before the company posts its fourth-quarter numbers on Thursday, March 16. It's quite possible -- perhaps even likely -- the market will see Dollar General in a more bullish light by then. There are four key reasons this may end up being the case.
1. Dollar General's inventory woes are probably abating
Much like peers and rivals Target, Walmart, and Dollar Tree, Dollar General procured too much inventory last year in anticipation of a sales surge that never happened. End result? The retailer found itself sitting on more merchandise than it could effectively handle, with too much capital tied up in the wrong goods -- an opportunity cost.
DG Revenue (Quarterly) data by YCharts
But if the inventory pare-back achieved by the aforementioned retailers is any indication, Dollar General achieved a similar result last quarter. That is, although it was likely a margin-crimping maneuver, the company is at least starting to rid itself of merchandise it doesn't need or want right now.
Investors should cheer this newfound fiscal (and logistical) flexibility.
2. Dollar General is built for this kind of tepid economic environment
Is the economy on the mend? Even the experts can't agree. But this indecision might ultimately point to a more nuanced reality: The rebound may merely be a tepid one, marked by continued relative comfort for the wealthy, and continued difficulty for middle- and below-middle-income households.
It's this very backdrop that plays right into the value-oriented hand Dollar General is holding. The store chain's appeal to below-average earners is relatively well documented. The company's average demographic, however, is changing. During the Q3 earnings call held in December, CEO Jeff Owen made a point of mentioning that Dollar General is drawing more customers earning as much as $100,000 per year. That metric jibes with a recent comment from Dollar Tree's CEO Mike Witynski, noting that most of its new customers live in households earning more than $80,000 per year.
Between the growing quest for value and the particular impact that weak economies have on lower-income households, Dollar General may be a core shopping staple for a huge number of consumers this year.
3. Dollar General's got plenty of growth-driving initiatives underway
Don't dismiss the potential of the growth initiatives the retailer is putting into -- and keeping -- in motion.
One of these projects is DG Fresh, which introduces more perishable groceries in the company's stores. Dollar General installed over 17,000 in-store coolers during the third quarter of last year, en route to what was expected to be the installation of 65,000 new coolers in 2022. Fresh produce is also already sold in over 3,000 Dollar General stores, with as many as 10,000 locales expected to eventually offer fresh fruits and vegetables.
These and other initiatives matter. Not only do they lead to potentially bigger ticket/transition sizes, they bring people into its stores that may not otherwise step foot in a Dollar General.
4. Dollar General likely topped Q4's earnings and sales estimates anyway
Finally (and statistically speaking), the discount store chain probably earned more than analysts are collectively expecting for the fourth quarter, as it has in 12 of its past 15 quarters. Look for a revenue beat as well.
Granted, the company is giving itself a leg up in this regard. Its preliminary fourth-quarter report dialed back its previous growth outlook for the three-month stretch in question. Dollar General had been calling for Q4 earnings of between $3.15 and $3.30 per share, but it warned shareholders late last month that the actual number would probably come in between $2.91 and $2.96 per share.
That seems relatively pessimistic, though, in light of Dollar General's recent maneuvering.
Underscoring this probability is the fact that Walmart, Target, and Dollar Tree already reported earnings beats for their most recently completed quarters, with Walmart and Dollar Tree doing so largely thanks to same-store sales growth that's better than the growth Dollar General says it's expecting for itself.
The spring is coiled for Dollar General
None of these four factors appears to be helping DG shares right now. As was noted, shares are well down for the past three months, with a big chunk of that setback taking shape in just the past two weeks -- after the company posted its preliminary fourth-quarter numbers.
This pullback, however, may be rooted in marketwide weakness and misguided perceptions more so than in Dollar General's plausible, probable current situation. The company's doing everything it's supposed to be doing, and it's doing it well. The upcoming fourth-quarter report only needs to remind investors this is the case, which could readily have the effect of prompting yet another sharp bounce.
And if that doesn't happen now, then it should at least happen soon. This certainly isn't a stock that stays down for very long, as investors eventually regain their faith in the chain's unique differentiation strategy.
