Investors have recently backed away from some formerly high-flying specialty retailer stocks. There is less enthusiasm for companies like Dollar General (DG -0.41%) and Foot Locker (FL 0.23%) today, mainly because their sales growth rates are slowing. Shrinking profit margins are putting pressure on these businesses, too.
Yet while those obstacles have helped both stocks become cheaper by about 30% so far in 2023, one seems like the clearer choice for investors seeking a rebound story. Let's take a closer look.
Missing expectations
Both companies missed management's short-term growth targets this past quarter, but Dollar General reported better sales metrics. Comparable-store sales rose 2% and overall revenue improved 7% thanks to the addition of new stores in the selling footprint. Executives said in early June that these results reflected a more challenging selling environment characterized by lower customer traffic and more constrained spending patterns.
Foot Locker didn't fare as well. The footwear giant's comps dove 9% through early May, in fact. Those results were pressured by the same traffic and spending issues that Dollar General noted, but Foot Locker also endured sharp price cuts aimed at keeping merchandise moving through its system. "Our sales have softened meaningfully given the tough macroeconomic backdrop," CEO Mary Dillon said in a press release.
Margin updates
Investors will also find more to like about Dollar General's finances. The value-focused retailer posted slightly higher gross profit margin this past quarter. Operating profit shrank only slightly, too, down to 8% of sales from 8.5% a year ago. As for the bottom line, net income landed at $514 million, or 5.5% of sales, compared to $555 million, or 6.3% of sales last year. It's encouraging that the company could essentially maintain profitability in this tougher environment.
FL Operating Margin (TTM) data by YCharts
Foot Locker, in contrast, saw gross profit margin fall by 4 percentage points even as selling expenses inched higher. As a result, operating profit shrank and is now sitting at below 7% of sales. The financial pain is likely to continue at least through the end of this fiscal year, too, management warned, as promotions continue throughout the footwear industry.
The price check
As you might expect, investors can purchase Foot Locker stock at a discount to its more successful retailing peer. Shares are valued at 0.3 times annual revenue compared to Dollar General's price-to-sales ratio of 1.
Investors shouldn't be too excited by that discount. Foot Locker may have many more quarters of disappointing sales and earnings results ahead given its challenging industry dynamics. The retailer has limited control over its rebound abilities, too, as it relies on footwear manufacturers to stock its aisles with fresh, innovative new products. Most of these suppliers, including Nike, are busy building up their own direct-to-consumer selling platforms.
Dollar General also has a wider merchandise base, which insulates it from demand swings in some smaller niches. A recession wouldn't hurt this business as much, either, and might help boost demand for many of its value brands. While neither retailer is putting up impressive operating metrics right now, the better buy today is Dollar General.
