Is Dollar General a Recession-Proof Investment?

If you’re on the hunt for a deal, the shiny lights of rock bottom prices at dollar stores can be a lure to any budget shopper worth their salt. But as you dive under the hood to really understand the economics of these cheap and cheerful stores, the picture gets a little murkier.

While customers are attracted to seemingly unbeatable prices, dollar stores may have a trick up their sleeves that is allowing them to in fact ride the coattails of “shrinkflation” to their benefit. 

Savvy shoppers have caught on to the fact that some so-called bargains are actually higher priced on a per unit basis in spite of the pizazz of the one dollar price tag.

Dollar General Corporation (NYSE:DG) is among the leaders in the category but that hasn’t translated to share price success of late, having lost 46% over the past year and 51% over the past five years. Will DG share price bounce back and how will it navigate if a recession hits?

Dollar Tree Is Extending Its Lead with Larger Footprint

In the dollar store industry, two major players stand apart, the first being Dollar General and the second being Dollar Tree, Inc. (NASDAQ:DLTR).

As with any market that has a small number of competitors, there is stiff competition, each vying for the top spot but recently Dollar General appears to have an edge over Dollar Tree, which recently announced that it will be closing 600 of locations this year.

Management has also announced plans to close an additional 370 Family Dollar stores, and 30 Dollar Tree locations over the next few years, which collectively represent 15% of its Family Dollar locations.

Inflation has been a major factor in these closures. Low-income individuals, who make up the majority of the store customers, have been hit by price hikes. Moreover, discount stores on the whole have struggled with shoplifting and robberies. To add to the woes, Family Dollar was hit with a fine for failing to abide by product safety standards.

When Dollar Tree bought Family Dollar for $8.5 billion in 2015, it had the hallmarks of being a smart buy but management has struggled to integrate the new stores into its brick-and-mortar portfolio, not least because the Family Dollar stores were in a worse condition than the acquirer had anticipated.

On the other hand, Dollar Tree is attempting to expand its footprint and management expects to follow through on 2,435 real estate projects, including 730 new store openings, 1,620 remodels, and 85 store relocations in the current year.

This is an update from its previous expectation of 2,385 real estate projects, including 800 new store openings, 1,500 remodels, and 85 store relocations.

While the new outlook assumes a lesser number of new store openings than the previous outlook, this is because the company has shifted focus to its mature stores. In such a competitive landscape, this could mean a substantial gain in market share.

20,022 Reasons to Buy Dollar General

Dollar General is almost inarguably the leading discount retailer, ending the last fiscal year with 20,022 locations in 48 U.S. states and Mexico. The company ended fiscal 2023 with $38.69 billion in net sales.

Over the past three fiscal years, Dollar General’s top line has grown, but the growth rates between the years show stark differences. Between fiscal 2021 and 2022, its top line grew by 10.6%, while between fiscal 2022 and 2023, this growth rate stood at just 2.2%. The company’s top line growth was partly offset by store closures.

When it comes to the bottom line, Dollar General’s margins lack the cushion room conservative investors would like to see. In FY2023, the company’s net income, on a GAAP basis, declined by 31.2% year-over-year to $1.66 billion, while between fiscal 2022 and 2021, there was a marginal increase. Inflation, although moderated, was an issue last year for Dollar General.

Net sales last quarter saw a moderate 4.2% increase from the prior year’s period to $10.2 billion. Store closures were once again an offsetting cause, hit by a greater-than-expected unfavorable sales mix.

Same-store sales climbed slightly by 2.4% versus the year prior and this was largely driven by customer traffic increasing though it must be stated that it was partially offset by lower average transaction amounts. As for the bottom line, well, net income fell sharply year-over-year from $468 million to $374 million.

How Has Dollar General’s Shareholder Returns Fare?

In Q1, the Board of Directors at Dollar General did not carry out any share repurchases, and its fiscal 2024 outlook has assumed no share repurchases for the current year.

The company does pay a dividend, though. Dollar General last declared a dividend of $0.59 per share. At the current quarterly rate, the annual dividend rate comes in at $2.36 per share, which yields 3.16% on the current share price.

Although Dollar General’s dividend has shown growth over some years, the payout ratio sits at 36.6% suggesting it’s quite safe and can be counted on going forward.

Is Dollar Tree Recession Proof?

Dollar Tree is largely recession proof because consumers become more price-conscious and “trade down” from higher-priced retailers to dollar stores.

With that said, the firm’s weakening margins could spell some uncertainty in spite of its leadership status in the industry. 

From an analysts perspective, the stock has upside to $95.86 per share, the consensus price target among 28 researchers. A discounted cash flow analysis suggests a similar upside opportunity to $94 per share.

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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.