It may feel like déjà vu for Dollar General (DG 2.73%) investors these days. The stock was down 44% in 2024 in what was a near repeat performance of how badly it did in the previous year, when its shares fell by nearly 45%. The discount retailer is dealing with rising costs and increased competition, making it difficult for it to produce strong results.
Has the stock bottomed out and can investors still trust it? Or is Dollar General simply too dangerous of an investment to be holding on to right now?
NYSE: DG
Key Data Points
Why has Dollar General stock been struggling so badly?
In 2024, Dollar General's results weren't good, to put it mildly. The company struggled to generate any meaningful growth, saying that its core customer was "financially constrained" and holding back on discretionary spending. The company has been seeing that with a growth rate that has been underwhelming compared to previous years.
DG Operating Revenue (Quarterly YoY Growth) data by YCharts
While the growth rate hasn't exactly fallen off a cliff, it hasn't been that strong, either. Comparable sales growth in each of its past three quarters has been around 2% or less. And it's the comparable numbers that demonstrate the level of organic growth the business is generating.
Investors don't see economic conditions improving anytime soon and are likely bracing for more challenging quarters ahead for Dollar General, hence the stock's continuous tailspin.
Is the company focusing on the wrong areas?
What concerns me about Dollar General is that rather than focusing on improving its margins and overall profitability, growth seems to take precedence for management. The business is still spending heavily on remodeling, making improvements at locations, and opening new stores, when perhaps it should be looking at trimming its store count in an effort to be leaner and prioritizing markets where profits and margins are strongest. The company currently operates more than 20,000 stores across the U.S., which can make it challenging to expand into new markets efficiently and without cannibalizing existing store sales.
In each of the past three quarters, the company has incurred a more than 20% decline in operating profit compared to the previous year. For the stock to turn things around, it's going to be imperative for Dollar General to prove to investors that its financials are in much stronger shape moving forward. But by still focusing on growth, I'm not sure that will be the case.
Can Dollar General stock be a good buy in 2025?
Shares of Dollar General haven't been this low since 2017, and so it may seem like an appealing time to buy the retail stock while it's at such a reduced price. But the danger is in assuming that things can't get worse, and that it has bottomed out. When profits are sliding and growth is hard to come by, that can be a devastating one-two punch for the stock that can ensure it remains on a continuous decline in the weeks and months ahead.
The stock's valuation may also look attractive since Dollar General is trading at just 12 times its trailing profits. But again, if those profits continue to fall, then the stock could look a lot more expensive in the near future. If the business isn't performing well, it could end up proving to be a value trap for investors.
Until the company can demonstrate a better path forward, one that includes a plan to drastically improve its bottom line, I would stay away from Dollar General stock because 2025 could prove to be yet another tough year for its shareholders.
