It's literally never been a worse time to be a shareholder of discount-retail chain Dollar General (DG 3.36%). The company went public in 2009, and until now, the biggest pullback for the stock was about 31% back in 2016. Right now, however, it's down about 60% from its high, nearly doubling its previous record drop.
Losing money stinks. But if there's any consolation to Dollar General's drop, it's that the stock now trades at an unprecedented value. Its price-to-earnings valuation has never been lower, its price-to-sales valuation has never been lower, and its dividend yield has never been higher.
DG PS Ratio data by YCharts
Dollar General stock trades in bargain territory for a reason. The company is struggling with certain things, including its supply chain. Management consequently expects its earnings per share (EPS) to drop by up to 34% year over year in 2023.
However, I believe fears surrounding Dollar General stock are overblown. After all, revenue is still at an all-time high and it's still profitable -- things could be far worse. All this stock needs is a little nudge to provide shareholders with a serious rebound.
Here are three potential catalysts for Dollar General stock that nobody is talking enough about right now.
1. Better inventory management
Dollar General wants to decrease its inventory. To do this, it will partially rely on markdowns to stimulate sales for slower-selling items. While this could increase sales, it will do so at the expense of profit margins. In fact, markdowns are a big reason management expects up to a 34% EPS drop.
The good news is that once it works its way through the inventory reduction, this profit-margin headwind will abate for Dollar General. Moreover, having less slow-moving inventory to deal with has additional cost benefits.
For example, Dollar General's management says there's a labor-expense benefit to cleaning out slow-moving inventory -- it won't be in the way and needing to be repeatably moved. Over the years, Dollar General's operating margin has often outperformed top competitor Dollar Tree, as the chart below shows.
DG Operating Margin (TTM) data by YCharts
I feel optimistic that this proven operator will iron out some operational wrinkles and return the company to better profitability.
2. Distribution center automation
Dollar General has around 19,500 locations as of the second quarter of 2023. With this many stores, its supply chain needs are great. As of March, it had 21 total distribution centers and it has three more being built.
This supply chain is now getting an important upgrade. Dollar General's distribution center in South Carolina was just upgraded with automation capabilities. In short, it makes labor more efficient at this distribution center. According to management, the location can supply up to 1,000 stores.
Over time, Dollar General could invest in more automation capabilities at its other distribution centers, boosting its profit margins.
For a real-life example, consider pet e-commerce company Chewy. In late 2020, the company opened its first automated distribution center. And in June, it opened its fourth automated facility. While its profits are still thin, Chewy's profit margins turned positive with the opening of its first automated distribution center, as the chart below shows.
CHWY Profit Margin (Quarterly) data by YCharts
Dollar General should also get a boost as it invests in automation.
3. Advertising technology?
As mentioned, Dollar General is reaching close to 20,000 locations, which is enormous. An under-appreciated thing about these stores is that 80% are located in small towns of 20,000 people or less.
This is beneficial because there's less competition for these small communities -- big-box retailers want to locate among larger populations. But there's another hidden advantage for Dollar General: It has first-party consumer data for small towns. It's one of the biggest datasets of its kind.
Recognizing the value of this data, Dollar General launched DG Media Network in 2018. Advertising partners include advertising technology (adtech) company The Trade Desk and Alphabet's Google. And in June, the company added 21 new partners -- advertisers that represent big names in the consumer-packaged goods space.
The value of Dollar General's consumer data shouldn't be overlooked. And it could provide a revenue catalyst as the company learns to better leverage it.
NYSE: DG
Key Data Points
Better days ahead
While I'm not predicting that Dollar General stock will recover all of its lost ground before the end of the year or anything like that, I do believe that the market is far too pessimistic regarding its long-term outlook. This company has been a long-term winner and I believe it will be again. And these three potential catalysts are a good reminder that things could be better than they seem right now.
The market is giving investors a great opportunity to make a long-term investment in Dollar General stock at a fabulous price.
