Shares of Dollar General (DG -0.33%) have had a great run so far in 2025 and are outperforming the S&P 500 by a wide margin. At this point, investors looking at the low-price retailer need to carefully consider its valuation. Is Dollar General stock still cheap, or has this year's rally made it too expensive?
A stunning showing for Dollar General
So far, 2025 has been marked by uncertainty. Economic uncertainty, geopolitical uncertainty, and tariff uncertainty have all left investors unsure of what to do. Just two months ago, the S&P 500 and Nasdaq Composite indexes both fell briefly into bear market territory.
Dollar General, however, has sidestepped this year's volatility with its stock steadily rising over 50% so far in 2025.
The stock price movement makes sense when you consider Dollar General's place in the retail sector. The company sells products at low prices, and its thousands of locations are able to reach underserved markets, often with less affluent customers. Uncertainty is actually good for this kind of business as consumers tighten their purse strings -- even wealthier customers will trade down to shop more with the retailer.
Unless the economy suddenly takes off, which seems unlikely given the ongoing trade war, Dollar General will benefit from its industry position. However, following such a strong rally year to date, investors should reassess its valuation.
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Dollar General has a really deep hole to dig out of
The first thing to understand about Dollar General's rise is that it's only a partial rebound from a much steeper decline. The stock is still down roughly 57% from its 2022 high-water mark. That's one sign that there's still room for the stock to run.
That said, the reasons for that decline warrant attention too. The retailer's earnings have been under pressure as its sales mix shifts toward lower-margin basics and costs rise due to inflation. That's not good news, but management is working on the issue even as it continues to grow the business, including opening new stores.
Fiscal first-quarter earnings show that progress is being made. Notably, same-store sales rose 2.4%, overall sales jumped 5.3%, and gross margin improved 78 basis points. In other words, the business looks like it's moving in the right direction.
Meanwhile, the stock's price-to-sales and price-to-book-value ratios remain well below their five-year averages.
The price-to-earnings ratio (P/E) is not as low, but remember Dollar General is still recovering from a period of declining earnings.
More room to run
Dollar General stock's rapid rise this year has been driven not just by the early success of the company's turnaround effort but also fears of an economic downturn.
If you're considering an investment in Dollar General today, you'll want to pay close attention to the progress the business is making in the quarters ahead. The current macroeconomic uncertainty will eventually pass, but the changes management puts in place could impact the company and share price long term.
