Given the stock's 30% pullback since late February, it would be easy to presume Dollar General's (DG 1.24%) core customers are struggling under the weight of inflation. Indeed, the Bureau of Labor Statistics says the annualized pace of consumer prices grew to 4.2% in May, largely thanks to the soaring cost of food and gasoline.
Yet, the discount retailer is doing surprisingly well, reporting respectable same-store sales growth of 2% for the three months ending in early May and companywide revenue growth of 3.4% year over year. Earnings grew even more thanks to curbed inventory costs, and the company's calling for even faster top- and bottom-line growth than for the full fiscal year.
What gives?
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Not yesteryear's Dollar General
Part of the answer lies in the fact that the company's full-year guidance actually suggests slowing sales growth ahead. Perhaps worse, investors may fear inflation hasn't yet actually affected Dollar General's results but could do so soon.
And these aren't unreasonable concerns. While middle-income consumers are increasingly shopping with Walmart to make their money go farther, there's been no real trade-down option for Dollar General's core demographic.
This is not the Dollar General of 2021 and 2022, though, when steep, unexpected inflation first surfaced that Dollar General wasn't ready for. It's ready now.
Take where most of the retailer's first-quarter sales growth came from as evidence. As it turns out, households earning at least $100,000 per year are becoming more regular patrons, accounting for the biggest piece of last quarter's 1.4% increase in total foot traffic. Gross profits also improved more than 60 basis points in Q1, suggesting the company is enjoying a combination of greater pricing power and lower merchandise costs. During the conference call for first-quarter earnings, Dollar General CEO Todd Vasos even touted the draw of a selection of over 2,000 items priced at $1 or less.
This is largely what was missing as Dollar General emerged from the COVID-19 pandemic in 2022.
NYSE: DG
Key Data Points
To buy or not to buy?
It's not necessarily a slam dunk you absolutely must immediately buy. Even if the retailer has quietly reinvented itself, clearly the market doesn't see it or believe it yet. More investors need to get on board if the stock's going to start recovering anytime soon.
For what it's worth, though, the analyst community seems optimistic, suggesting this stock's worth $130.61 per share versus the ticker's current price of less than $109.
It's also worth acknowledging that Dollar General's seemingly tepid guidance may represent the worst-case scenario, setting the stage for earnings and revenue beats in the year ahead. The company's been racking those up since its regrouping effort was finalized early last year.
Bottom line? It's still not a great core holding, simply because its net growth potential remains modest no matter how well it performs -- never mind the lack of certainty that last quarter's results are an indication of how the rest of the year will turn out. If you've got room in your portfolio for a value name that's underpriced because it's currently underestimated, though, there's a case to be made for stepping into this one.
