It's been a year to forget for Dollar General(NYSE: DG) investors, with shares of the discount store giant down 40% in 2024. The company struggled to manage a shifting macroeconomic backdrop evidenced by soft sales and a declining earnings.
The headlines don't inspire much confidence, but shareholders should think twice before raising the white flag in defeat considering several reasons to remain optimistic Dollar General can 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 necessities. One of the challenges this year has been the dynamic of its low-income customers feeling "financially constrained" amid the cumulative impact of high inflation and elevated borrowing costs. Management has cited those headwinds to explain the weak results.
In the last reported third quarter (ended Aug. 2) Dollar General missed expectations as same-store sales climbed by just 0.5% year over year. A sharply lower operating margin pushed earnings per share (EPS) to $1.70, down 20% from the prior-year quarter.
The other setback for the stock has been the muted full-year guidance. Dollar General now expects 2024 same-store sales to increase between 1% and 1.6%, compared to its previous 2% to 2.7% estimate. Similarly, the company is forecasting EPS in the range of $5.50 to $6.20, compared to its prior $7.18 midpoint target.
The trends here aren't great, but the big picture is that Dollar General remains profitable and continues to generate positive growth. Beyond the stock price sell-off, fundamentals are stable with plenty of room for improvement. A stronger outlook into 2025 could be the first step for the stock to rally higher.
Image source: Getty Images.
2. Well positioned for a turnaround
A major theme for Dollar General this year is its "Back to Basics" strategy to refocus on core strengths and create value for shareholders. The company intends to invest in its workforce to reduce employee turnover, address supply chain constraints, and optimize inventory efficiency. For its customers, Dollar General is reorganizing its merchandise mix with an eye on competitive pricing to improve growth.
Ultimately, I believe the plan can work with several levers management can pull to support sales and margins. The ability to adjust ongoing store expansion toward new locations in the most attractive markets or make a bigger push into product categories customers seek can deliver more financial consistency.
According to Wall Street estimates, Dollar General's EPS is forecast to rebound 7.8% next year to $6.30 alongside a 4.8% increase in revenue.
Evidence of results moving in this direction should help build positive market sentiment as a catalyst for the stock to rally higher. I also expect the operating environment to benefit into 2025 as the Federal Reserve moves to cut interest rates, which could propel consumer spending into a new economic growth cycle.
| Metric | 2024 (Estimate) | 2025 (Estimate) |
|---|---|---|
| Revenue | $40.52 billion | $42.48 billion |
| Change (YOY) | 4.7% | 4.8% |
| EPS | $5.84 | $6.30 |
| Change (YOY) | (23%) | 7.8% |
Data source: Yahoo Finance. YOY = year over year.
3. A bargain valuation
I sense that the sell-off in Dollar General's stock is overdone, leaving shares fundamentally undervalued trading at 14 times the 2024 consensus EPS as a forward price-to-earnings (P/E) ratio.
Notably, this level marks a deep discount to its average historical earnings multiple and a large spread relative to industry peers like 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 bargain in the industry.
Compared to smaller competitor Dollar Tree, trading at a similar 13 times 2024 earnings, Dollar General has managed stronger same-store sales and pays a regular quarterly dividend that currently yields 2.9%. Overall, the stock looks to be on sale assuming the long-term outlook is intact.
DG PE Ratio (Forward) data by YCharts
Final thoughts
Dollar General has gone through a reset of expectations. The opportunity today is to pick up shares in this beaten-down industry leader still capable of turning things around. Recognizing the company still has a lot to prove in what will be a critical 2025, I believe Dollar General stock deserves a buy rating and can work for investors within a diversified portfolio.
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Dan Victor has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale, Target, and Walmart. The Motley Fool has a disclosure policy.
