Wall Street isn't sure what to make of Dollar General (DG 4.39%) stock right now. The retailer's shares had been trouncing the market for most of the past year but those positive returns have all but disappeared in the wake of its recent earnings update. Investors are nervous about slowing sales trends and the potential for weak profits through most of 2023.

Let's take a closer look at its operating update and whether investors should pass on Dollar General's stock today.

Latest results

Dollar General reported a 4.3% same-store sales increase for Q4, which was worse than management had originally forecast. That result also seems underwhelming, compared to some retailing peers. Walmart and Costco are growing comps at a faster rate in the core U.S. market, after all.

Dollar General is still in a strong sales position, though. Executives said in a conference call with investors that most of the Q4 slowdown was caused by unfavorable weather just before the Christmas holiday. And unlike Walmart and Costco, Dollar General is quickly expanding its store base and sees room for many more locations over time.

The addition of new shops helped overall sales increase by a blazing 18% in Q4. "We made significant progress advancing our operating priorities... in fiscal 2022," CEO Jeff Owen said in a press release.

Profits and cash

Investors are concerned about Dollar General's short-term earnings outlook, which isn't bright. Sure, the operating profit margin held steady at 9% of sales, keeping it well above peers like Walmart and Target. But executives said profits will look weak in Q1 and Q2, thanks to several headwinds including rising interest expenses, higher labor costs, and a tilt in demand toward more consumer staples products.

DG Operating Margin (TTM) Chart

DG Operating Margin (TTM) data by YCharts.

Most Wall Street pros are predicting that earnings will fall this quarter, down to $2.39 per share from $2.41 per share a year ago. Investors will have to wait until later in the year before this negative trend starts to reverse itself.

"We expect EPS [earnings-per-share] growth to be much stronger in the second half [of 2023] compared to the first half of the year," CFO John Garratt told investors in mid-March.

Outlook and valuation

Dollar General shares don't look especially cheap, even after the pullback in 2023. Investors are paying 1.3 times sales for the stock right now, or about double the valuation of both Walmart and Target.

Some of that premium is justified by Dollar General's attractive growth profile. Management is planning to open over 1,000 new locations in fiscal 2023. And the company's profitability should still trounce rivals this year, despite the short-term decline in Q1 and Q2.

Investors who aren't risk averse might see the stock as a solid buy right now since the chain has positive market-share momentum and is highly likely to post improving margins over time. On the other hand, shares could become even cheaper if economic growth rates slow further.