Those who hopped on the Dollar General (DG -1.68%) train after its tough bear run in 2023 have been handsomely rewarded.
The stock is up 49% over the last six months. Fourth quarter results caused a bit of skepticism after revenue declined by roughly 3.4% year over year to $9.68 billion. To me, there are a few big picture narratives that outweigh the short term stagnation. So, can the Dollar General bull run continue?
Two promising developments
I really like Dollar General's foray into fresh produce. The stores are incredibly convenient for picking up things like toilet paper or a bottle of soda, but juggernauts like Walmart (WMT -0.03%) have still retained control of the grocery category. The introduction of fresh fruits and vegetables to Dollar General locations opens up a whole new battle line for the stores.
This "Food First" initiative was announced back in July. Dollar General has a private label brand known as "Clover Valley" that it stands to distribute over its stores. Currently there are 5,000 locations offering fresh produce. With a total of over 19,000 store locations overall, there is plenty of room to run in this category as it gains traction.
The second attractive catalyst is weakening competition. Let's be honest. There are a lot of dollar stores out there fighting for market share. Dollar Tree's (DLTR -3.49%) recent announcement to close 15% of its stores (primarily Family Dollar locations) might look like a sign that Dollar General's market is at risk. To me, the opposite logic is true.
If Dollar Tree closes 15% of its locations, this opens up potential market share for Dollar General, which announced that it planned to open 800 new stores in 2024. These two businesses also had very different fiscal years. Dollar Tree lost nearly $1 billion in fiscal 2023, while Dollar General brought in $1.67 billion. Overall net income was still lower than the year prior, but Dollar General is still very profitable.
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Guidance and looking ahead
Current 2024 guidance is for same store sales growth of 2% to 2.7%, earnings of $6.80 per share to $7.55 per share, coupled with the planned new stores openings, and remodels of 1,500 locations.
Off of that guidance, Dollar General is conservatively trading at a forward P/E ratio of 22.6x forward earnings (at the time of writing), which isn't far off of the company's 5 year average P/E ratio of 21. This implies that good news to the upside can create a bull case for the stock.
Overall, the potential pain for the company appears to be in the short term, with most of the anticipated weakness in 2024 resting in the first fiscal quarter.
CFO Kelly Dilts noted in the company's Q4 press release that they "anticipate the first quarter will be pressured by our lowest expected same-store-sales increase of any quarter in fiscal 2024, as well as the annualization of prior year headwinds such as retail labor and shrink, we are focused on delivering our full year plans, including anticipated strong EPS growth in the back half of the year."
This seems to imply that Dollar General is expecting improving momentum as we progress through 2024, as the company works to improve the situation. The combination of new store openings, expansion of locations with fresh produce like fruits and vegetables, and decline in competing Dollar Tree owned stores lead me to believe there's more potential here than some are thinking.
As we head into the latter part of the year, those willing to hold their shares might be handsomely rewarded. I intend to keep my position in Dollar General and monitor the situation, especially as we move into the second half of the year. Given the upbeat sentiment from management for the second half of 2024, combined with the weakening presence of one of its top rivals, Dollar General's bull case seems intact.
