Dollar General's (DG 4.39%) stock price dipped 3% on March 16 after it posted its latest earnings report. In the fourth quarter of fiscal 2022, which ended on Feb. 2, the discount retailer's net sales rose 17.9% year over year to $10.2 billion but missed analysts' estimates by $40 million. Most of that growth was driven by new store openings and an extra week compared to the prior-year quarter. Its same-store sales, which exclude its new stores and the extra week, grew 5.7%. Its diluted earnings increased 15.2% to $2.96 per share and cleared the consensus forecast by two cents.

For the full year Dollar General's net sales rose 10.6% to $37.8 billion, its same-store sales improved 4.3%, and its diluted EPS grew 5% to $10.68. All three of those growth rates accelerated from fiscal 2021, when it faced tough comparisons to its pandemic-induced growth spurt in fiscal 2020.

A smiling person fills up a shopping cart.

Image source: Getty Images.

Dollar General is growing at a healthier clip than many other retailers, but its stock has stayed roughly flat over the past 12 months. Let's review its business model, growth rates, and valuations to see if it will head higher this year.

A recession-resistant business model

Dollar General shouldn't be confused with its industry peer Dollar Tree (DLTR 0.67%), which also owns Family Dollar. Dollar Tree opens most of its stores in urban areas, while most of Dollar General's stores are located in rural areas that are underserved by Walmart (WMT 0.83%) and other large retailers.

Dollar General also isn't a true "dollar store" that sells all of its products for a dollar. Instead, it simply sells most of its products at lower prices than superstores like Walmart and online retail giants like Amazon (AMZN -0.17%)

Dollar Tree's namesake banner sold all of its products for a dollar for 35 years until it finally raised its prices to $1.25 in late 2021. Family Dollar, which it acquired in 2015, doesn't stick with those rigid pricing rules -- but it's repeatedly struggled to keep pace with Walmart and other discount retailers in saturated regions.

Dollar General continued to expand even as the retail apocalypse wiped out many of its brick-and-mortar peers over the past decade. Between fiscal 2012 and fiscal 2022, it increased its store count from 10,506 to 19,104 locations. Walmart briefly challenged Dollar General with its smaller Walmart Express stores, but it eventually shut down that struggling banner and sold 41 of the remaining locations to Dollar General in 2016.

Dollar General's net sales rose at a compound annual growth rate (CAGR) of 9% from fiscal 2012 to 2022 -- even as it endured the trade war, COVID-19 pandemic, and inflationary headwinds -- while its EPS grew at a CAGR of 14%. It also repurchased more than 30% of its shares over the past decade and started paying a dividend in 2015. It subsequently raised that payout every year.

In fiscal 2023, Dollar General expects its net sales to rise 5.5%-6%, its same-store sales to increase 3%-3.5%, and its diluted EPS to grow about 4%-6%. It also plans to open 1,050 new stores, remodel 2,000 locations, and relocate 120 stores, even as it faces tougher macroeconomic headwinds throughout the first half of the year. That stable outlook suggests that Dollar General is still an appealing stock to hold in an inflationary environment. 

So why isn't Dollar General's stock rising?

Dollar General's stock outperformed the S&P 500's 9% decline over the past 12 months, but its nearly flat returns and low forward yield of 1% likely made it less appealing than savings accounts, CDs, and Treasury bills, which all offer much higher yields with less risk in this high-interest-rate environment.

But investors should still recall that Dollar General's stock generated a total return of nearly 380% over the past decade, which easily eclipses the returns of any fixed-income investment. Dollar Tree, which struggled to integrate Family Dollar for several years, generated a total return of about 210% during that same period.

Dollar General's stock is still reasonably valued at 19 times forward earnings. Dollar Tree trades at 21 times forward earnings, while Walmart has an even higher forward multiple of 23. Therefore, Dollar General's downside should be limited at these levels -- but its upside could also be limited as long as there are better safe-haven plays to choose from.

Based on these facts, I believe Dollar General's stock might remain stagnant over the next 12 months. It's still a solid long-term investment, but it probably won't attract more attention until interest rates cool down.