Shares of Dollar General (NYSE:DG) have risen significantly in recent trading sessions, posting a gain of over 16 percent in the last five days alone.
This brings the stock’s 3-month return to just under 50 percent, though DG shares still trade well below both their 52-week and all-time highs.
Let’s take a look at what’s driving DG up, how it is performing and how high Dollar General stock could go from here.
Why Is DG Soaring Now?
Though some of Dollar General’s recent increase can be attributed to the market’s general recovery after the tariff shock in early April, the company also turned in a much stronger-than-expected Q1 earnings report.
Net sales increased 5.3 percent year-over-year to $10.4 billion, including a 2.4 percent increase in same-store sales.
These revenue numbers, however, were considerably beaten out by the 7.9 percent Dollar General reported in its EPS. Cash flow from operations also surged by almost 28 percent to a quarterly total of $847.2 million.
The Q1 earnings report helped to demonstrate the success of the Back to Basics initiative, meant to combat a trend of declining earnings that has defined performance over the last two years.
The initiative has seen management invest in store staff to improve execution while also improving merchandising and supply chain logistics. Although Dollar General has only posted one quarter of earnings growth after an 8-quarter streak of declining earnings, the sudden increase in EPS was a major win for investors.
Putting the Price Surge in Context
Although shares of DG have recovered quite a lot, the stock is still down more than 12 percent over the last year.
While the trailing P/E ratio has returned to something of a normal range at 21.7 times earnings, its dividend yield is still well above historical averages at a bit over 2 percent.
So, while Dollar General has certainly made up a lot of the ground it lost, the stock is still priced well below its high point. This, of course, makes a great deal of sense because the EPS is still depressed after two years of falling consistently.
Are There More Growth Headwinds Ahead for Dollar General?
In addition to improving its current performance, Dollar General could have more room for growth ahead. To begin with, over 60 percent of American consumers are either already changing or planning to change their spending habits due to concerns over tariff-related price increases.
This trend of trading down and reducing spending could be extremely beneficial to Dollar General, which historically has done well during downturns and tough times.
Dollar General could also continue to benefit from its strategy of placing stores in rural communities with little to no competition. In the long run, this strategy may help insulate it from key competitors, especially Walmart, that operate stores too large to be economically feasible in small, sparsely populated areas.
In addition to its Back to Basics program, Dollar General is also pursuing another strategic initiative it calls Project Elevate. This program targets remodels and upgrades in mature stores with the goal of driving gradual sales growth from existing properties that may have been stagnant up to now.
This project allows Dollar General to take a two-pronged approach to growth, maximizing the value of older locations while it continues to expand with new ones. Combined with the fundamental improvements the leadership team has made to its operations, this strategy could set the stage for a long growth runway.
Where Do Analysts See DG Going?
Even before Q1’s earnings came out, analysts had been slowly increasing their consensus price targets for DG stock.
With Q1’s earnings only released a few days ago, though, it’s quite possible that additional upward revisions could occur shortly after the time of this writing.
So, How High Can Dollar General Go?
Right now, the consensus price target of $114.62 is only about 1 percent higher but the high-end is $135 per share.
There’s little doubt that Dollar General looks far more attractive today than it did as recently as a few months ago. However, it’s important to remember that some headwinds could still affect the business in the short term.
Even after beating its own Q1 expectations, management acknowledged that the rest of this year could be choppy due to uncertain tariff policies and economic conditions. However, the macroeconomic risks didn’t prevent management from revising its 2025 guidance slightly upward to reflect the strong performance in Q1.
With that said, Dollar General has executed very well to return itself to earnings growth and raise its same-store sales while also expanding into new locations. If the team can keep its momentum up, it seems reasonable to suppose that the stock could move back up toward its 52-week high of about $135. This would seem to price in a higher level of sustained earnings growth without leaving the stock fundamentally overvalued.
On a longer-term basis, Dollar General could be a good stock to hold for ongoing compounded returns. Even with the struggles it has faced over the last couple of years, Dollar General has remained profitable and still has the potential for steady earnings growth from this point forward. Project Elevate, combined with the opening of new stores, leaves a significant runway for DG.
In the meantime, it’s also worth keeping DG’s dividend in mind. With a yield higher than the average of the S&P 500, a payout ratio of only 45 percent and a return to growth seemingly ahead, Dollar General has many of the hallmarks of a solid dividend growth investment.
This may add to its appeal as a long-term holding, especially for investors who have the opportunity to buy while the dividend yield is still well above what DG has historically offered.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.
