Two of the worst-performing stocks in the retail sector over the past year have been Dollar General (DG +0.87%) and Five Below (FIVE 3.37%), with both stocks' value cut in half over the past 12 months, as of this writing.
While both retail concepts revolve around selling cheap goods, their core demographics and the problems they have been facing are quite different. With that in mind, let's examine which stock might be the better rebound candidate in 2025.
Getting squished
NASDAQ: FIVE
Key Data Points
Dollar General's recent issues have largely stemmed from the pressure its core, lower-income customers have been experiencing due to inflation, as well as competition from Walmart (WMT 1.56%). A lot of Five Below's problems, meanwhile, can be traced back to Squishmallows.
If you are unfamiliar with Squishmallows, they are kind of a combination of a stuffed animal and pillow made by a company called Jazwares, which is a subsidiary of Berkshire Hathaway. First introduced in 2017, these plush toys began to gain a cult-like following much like Beanie Babies in the 1990s. This in turn led to certain Squishmallows becoming very popular and selling for big prices on the secondary market. This became a big business, with individuals and resellers scouring stores to find popular Squishmallows.
Five Below was one of the retailers caught up in Squishmallow mania, but it got caught on the wrong side of the trend when the mania faded and it was left with way too much Squishmallow inventory that was no longer popular. In addition, it faced tough comparisons as Squishmallows helped drive sales and also brought in a lot of customers that were mostly interested in just Squishmallows. Its same-store sales turned negative in its fiscal first quarter (ended early May) before turning slightly positive in fiscal Q3. However, they were back to negative for fiscal Q4, largely due to five fewer holiday shopping days.
Overall, Five Below's same-store sales fell about 3% for the year. However, the company is seeing overall revenue and profits grow as it continues to expand its store base. At the start of November, it had 1,749 stores in 44 states, an 18% increase over a year ago. The company plans to add about 150 new stores in fiscal 2026 (ending early February), which would be about a 9% increase.
NYSE: DG
Key Data Points
While Five Below is much more focused on merchandise for teens and tweens, Dollar General's assortment is centered on basic necessities. It caters more toward low-income consumers, with about 60% of its customers having a household income of less than $35,000 a year. Not surprisingly, these consumers have been more impacted by the recent levels of high inflation over the past few years.
Dollar General has been modestly growing its same-store sales, but it needs same-store sales growth of more than 3% in order to leverage its expenses and grow its earnings. Meanwhile, its customers have turned more toward lower-margin consumable items, which has led to margin pressure. Last quarter (Q3 2024), it reported a 5% increase in revenue and a same-store sales increase of 1.3%, but its diluted earnings per share plunged 29.4%.
The dollar store retailer has carved a niche by building locations in smaller rural towns. However, with its lower-income customers struggling, many have turned to Walmart, where they can often find better value. Meanwhile, 90% of the U.S. population is now within 10 miles of a Walmart or Sam's Club. Walmart has also introduced same-day delivery.
In response, Dollar General announced in December that it was testing its own same-day delivery at 75 locations. The company thinks this could also be an opportunity to grow its ad business, as customers would engage with its app more. Ads tend to be high margin, and Walmart has seen strong growth in this area.
Moving ahead, Dollar General is continuing to expand its store base, with plans to open 575 stores in the U.S. and up to 15 in Mexico. It also plans to fully renovate 2,000 stores and partially renovate another 2,250 locations through its Project Elevate, which won't include cooler expansions or fresh produce like the fully renovated stores will. The company currently operates more than 20,000 stores.
Image source: Getty Images.
Valuations and verdict
From a valuation perspective, Dollar General is the cheaper of the two stocks, trading at a forward price-to-earnings (P/E) ratio of 11.5 versus 17.8 for Five Below. However, it is also worth noting that Dollar General does have $5.7 billion in net debt, while Five Below is currently debt free.
DG PE Ratio (Forward 1y) data by YCharts
Overall, despite the higher valuation I prefer Five Below as the better rebound candidate. I think its challenges will be easier to overcome, and the company has a new CEO in Winnie Park who has a lot of retail experience catering to younger demographics. As it laps the Squishmallow overhang and corrects some other merchandizing mistakes, it should be able to return to solid growth.
Dollar General, meanwhile, is still facing a weakened environment for low-income consumers and fierce competition from Walmart. Those challenges will be more difficult to overcome, in my view.
