3 Reasons to Buy Dollar General Stock Like There’s No Tomorrow

It has been a year to forget Dollar General (DG -5.10%) investors, with shares of the discount retail giant falling 40% in 2024. The company struggled to cope with a changing macroeconomic backdrop, evidenced by weak sales and declining earnings.

The headlines don’t inspire much confidence, but shareholders should think twice before raising the white flag in defeat given several reasons to remain bullish. Dollar General could storm back in 2025. Let’s look at three of them.

1. Still profitable with positive growth

Dollar General operates 20,345 stores through a convenience store concept specializing in everyday household items. One of the challenges this year has been the dynamics of its low-income customers feeling “financially constrained” amid the cumulative impact of high inflation and increased borrowing costs. Management has cited these headwinds to explain the weak results.

In the last reported third quarter (ended Aug. 2), Dollar General missed expectations as same-store sales rose just 0.5% year over year. A significantly lower operating margin pushed earnings per share (EPS) to $1.70, down 20% from the prior quarter.

The second setback for the share has been the muted full-year guidance. Dollar General now expects same-store sales in 2024 to rise between 1% and 1.6%, compared to its previous estimate of 2% to 2.7%. Similarly, the company expects EPS in the range of $5.50 to $6.20 compared to its previous $7.18 midpoint target.

The trends here aren’t huge, but the big picture is that Dollar General remains profitable and continues to generate positive growth. In addition to the share price sell-off, the fundamentals are stable with plenty of room for improvement. A stronger outlook for 2025 could be the first step to the stock moving higher.

Image source: Getty Images.

2. Well placed for a turnaround

A major theme for Dollar General this year is its “Back to Basics” strategy of focusing on core strengths and creating shareholder value. The company intends to invest in its workforce to reduce employee turnover, address supply chain constraints and optimize warehouse efficiency. For its customers, Dollar General is reorganizing its merchandise mix for competitive pricing to improve growth.

Ultimately, I think the plan can work with multiple levers that management can pull to support sales and margins. The ability to align ongoing store expansion toward new locations in the most attractive markets or make a bigger push into product categories customers are seeking can deliver more financial consistency.

According to Wall Street estimates, Dollar General’s EPS is expected to rise 7.8% next year to $6.30, along with a 4.8% increase in revenue.

Evidence of earnings moving in this direction should help build positive market sentiment as a catalyst for the stock to move higher. I also expect the operating environment to benefit into 2025 as the Federal Reserve moves to lower interest rates, which could propel consumer spending into a new economic growth cycle.

Data source: Yahoo Finance. YYYY = year over year.

3. An offer assessment

I sense that the selloff in Dollar General’s stock is overdone, leaving shares fundamentally undervalued at 14 times consensus 2024 EPS as a forward price-to-earnings (P/E) ratio.

In particular, this level marks a deep discount to its average historical earnings multiple and a wide spread compared to industry peers such as Walmart at a forward P/E of 50 and Costco Wholesale at 34. While Dollar General has underperformed the group this year, the stock stands out as a good buy in the industry.

Compared to smaller competitor Dollar treeDollar General, which trades at 13 times 2024 equivalent earnings, has managed stronger same-store sales and pays a regular quarterly dividend that currently yields 2.9%. Overall, the stock appears to be a sell, assuming the long-term outlook remains intact.

DG PE ratio (forward) data of YCharts

Final thoughts

Dollar General has undergone a reset of expectations. The opportunity today is to pick up shares in this battered industry leader that is still capable of turning things around. Recognizing that the company still has a lot to prove in what will be a critical 2025, I think Dollar General stock deserves a buy rating and could work for investors in a diversified portfolio.