Dollar General (DG +2.60%) has been a laggard on the stock market in recent years as the company has lost market share to Walmart and struggled in an environment with weak consumer discretionary spending. Over the last three years, Dollar General's stock is down 63% while the broad market has surged.
However, there are signs that Dollar General has hit rock bottom. 2024 was no doubt a rough year for the discount retailer as operating income plunged 30% in 2024 to $1.7 billion due to the economic challenges as well as increased markdowns, increased inventory damage, and an unfavorable shift in sales mix.
The company's fourth-quarter earnings report last week was generally dismal as it badly missed bottom-line estimates, and its earnings-per-share (EPS) guidance was also below the consensus.
In spite of that, the stock actually jumped 7% on the report as that EPS guidance still called for growth this year, and the company offered longer-term guidance that gave investors confidence that the company would return to steady growth.
Additionally, Dollar General seems to have bucked the broader stock market sell-off during the recent correction as the stock is actually up 9% over the last month even as the S&P 500 is down roughly 10%.
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Dollar General's turnaround plan
The retailer had already announced its "Back to Basics" plan, which includes a focus on improving out-of-stocks, making sure the checkout area is adequately staffed, and streamlining its supply chain by closing some temporary storage facilities.
In its Q4 earnings report, Dollar General also shared a new real estate optimization plan, saying it planned to close 96 Dollar General stores and 45 Popshelf stores (its home goods sub brand), taking a charge of $232 million on the closures.
Though that may sound like a setback for the company, closing underperforming stores should make the underlying business more profitable, and Dollar General still plans to aggressively open new stores. In 2025 it plans to open 575 new stores in the U.S. and 15 stores in Mexico in addition to remodeling 4,250 stores, including 2,250 under its Project Elevate program, which is designed to enhance the customer experience but is not a full remodel.
The company also gave long-term guidance, saying it would grow same-store sales by 2% to 3% annually over the next five years and increase EPS by 10% annually starting next year. It also envisions returning to an adjusted operating margin of 6% to 7% by 2028 to 2029.
If Dollar General can hit those numbers, the stock looks like an easy winner from here as the company trades at a price-to-earnings ratio of 16 currently, a substantial discount to the S&P 500.
NYSE: DG
Key Data Points
Investors will have to be patient
Despite the recovery plan, the macroeconomic landscape remains challenging, and management said it was not anticipating any improvement in the macroeconomic environment this year, "particularly for our core customer."
Dollar General does face challenges, but the company has a long-term track record of delivering steady growth and dominates its niche in small-footprint discount retail. The company is the country's largest retail banner with more than 20,000 stores in the U.S., another testament to its success.
Overall, Dollar General is a proven retail leader that's trading at a discount to the S&P 500, and its performance is already turning around as its guidance calling for 2025 earnings growth indicates. At a time when valuations are compressing, and investors are worried about an intensifying trade war, Dollar General's focus on necessities like groceries and its steady growth plan should make it a market-beater over the next five years.
