The market has rebounded nicely this year. After dropping 19.4% in 2022, the S&P 500 has gained 17.8% so far in 2023. You may feel like you've missed the boat, but there's always an opportunity to find high-quality stocks that offer attractive growth opportunities.
Is Dollar General (DG -0.41%) one of those stocks? The company has a long and successful track record, but has stumbled lately. It's time to look closer at this discount retailer to see if it warrants investing your hard-earned money.
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Confronting challenges
Despite the company's name, Dollar General sells most merchandise for under $10. With the bulk of sales coming from the consumables category (everyday items like paper towels, trash bags, and food), Dollar General's stores are particularly alluring for shoppers during times of economic challenge.
But that's not always the case. Dollar General's same-store sales (comps) rose by 1.6% in the first fiscal quarter, covering the period that ended May 5. But this was driven by higher spending largely due to higher prices even as items per transaction dropped and traffic fell. Additionally, management slashed its comps guidance for this year. It now expects an increase of 1% to 3%, down from the previous guidance of 3% to 3.5%.
It also revised its earnings-per-share forecast, calling for a range of flat to down 8%; its prior expectation was for growth of 4% to 6%. Management blamed an economic climate that was more challenging than expected.
Meanwhile, other discount retailers have not encountered the same difficulties. Dollar Tree operates its namesake stores, which typically sell merchandise for $1.25, and the Family Dollar chain (goods generally sell for $1 to $10). The former's fiscal first-quarter comps increased by 3.4%, and the latter's were up by 6.6%. Both drew increased traffic, and the company's CEO noted it had gained market share.
With higher prices than some competitors, will Dollar General have to lower those prices to remain competitive? That could hurt its gross margin, which was 31.6% in the first quarter. Meanwhile, Dollar Tree's first-quarter gross margin was 30.5%.
Better dividend options
Dollar General has increased dividends since initiating a payment in 2015. But last year's free cash flow (FCF) didn't cover dividends. Fiscal 2023's FCF was $424 million while dividends totaled $493.7 million.
Dollar General 1.4% dividend yield trails the S&P 500's 1.5% payout. If you are looking for strong dividend payers, you might consider a stock like a Dividend King, a member of the S&P 500 that has raised its payout for at least 50 years.
Cheaper valuation
Since the start of the year, Dollar General's stock has dropped by over 33%. That translates into a cheaper valuation. The shares trade at a price-to-earnings (P/E) ratio of 16 -- down from about 24 in January.
So does this represent a bargain? With management forecasting lower sales and earnings for this year, it's tough to argue that you should rush to buy Dollar General's stock. With Dollar General's company-specific challenges, I'd take a pass right now.
