It's been a tough year for Dollar General (DG -0.41%) shareholders. Despite the rebound from October's multi-year low the retailer's stock still trades down 52% from last November's high.
Wednesday's advance does a great deal to cement the current recovery effort in place, however. Although the intraday gain has since pared back a bit from its peak of 5.6%, the two key underpinnings of the move suggest Dollar General shares could keep rallying.
All signs point to bullishness for Dollar General
At least some of the credit for Wednesday's market-beating gain from Dollar General belongs to rival retailer Target (TGT 0.18%). Although its sales are still declining, Target's third-quarter top line of $25.4 billion beat estimates of $25.3 billion. Per-share earnings of $2.10 were well up from the year-ago bottom line of $1.54, easily topping estimates of $1.47. These Q3 figures sparked a wave of bullish interest in most retail stocks.
Perhaps the bigger driver of Dollar General stock's gains on Wednesday, however, are numbers from the U.S. Census Bureau and the Bureau of Labor Statistics.
Last month's domestic retail spending slipped as expected, but the 0.1% dip was better than the predicted 0.3% decline in spending. In the meantime, domestic inflation continues to cool off. Producers' overall costs plunged 0.5% in October, marking the biggest monthly drop since April of 2020. Tuesday's consumer inflation figures are the more-watched of the two sets, but Wednesday's producer inflation report confirms that last month's inflation decline wasn't a fluke.
Curbed inflation is good news for consumers and corporations alike. It's particularly good news for Dollar General because its core customers -- individuals earning $40,000 or less per year -- have been hit especially hard by higher costs. Whereas more affluent households may "trade down" from a retailer like Target to Walmart, a sizable segment of Dollar General's usual shoppers are simply buying less.
A so-so economy is ideal for Dollar General's turnaround effort
One day's worth of encouraging news isn't enough reason to step into a particular stock. But, more than one day's worth of good news is in play here. Inflation has been cooling for several months now, and the rhetoric increasingly suggests the Federal Reserve may be done raising rates. Best of all, the United States economy has thus far managed to evade slipping into a recession. The idea that it may be able to make a so-called "soft landing" that slowly eases its way back to good growth is holding more and more water.
Such a scenario is ideal for Dollar General, which struggled with the unusual nature of the post-pandemic recovery. A lukewarm economy plays right into the hand it's holding. At the same time, several strategic changes it's been working on should start taking hold.
There's apt to be plenty more volatility in store for Dollar General stock. If you can stomach it though, today's strength is yet another sign it's got some upside potential to tap into.
