Is Dollar General Stock A Buy?

Dollar General Corp (NYSE:DG) is a prolific American retail chain based in Goodlettsville, Tennessee. The company operates over 16,278 stores in the continental United States and is one of the most profitable retailers in rural America.

It’s the industry’s sleeper hit as the discount retailer grew top-line sales by 24 percent at the height of the economic calamity that hit so many other brick and mortar stores.

Same-store sales improved by 19 percent that quarter, and it wasn’t long before the company announced expansion plans.

Whether you shop there or not, is Dollar General stock a Buy?

The company opened 780 new stores in 2020 in spite of a brick-and-mortar armageddon. It also expects to open 1,050 new stores through the 2021 fiscal year.

Is Dollar General stock still a value for investors or are there better ways to spend a dollar?

75% Of Dollar General Stores In Small Towns 

As alluded to by its name, Dollar General is a discount variety store lovingly referred to as “dollar stores” in the U.S. It started as a family business in Tennessee and went public in 1968 before transitioning back into a private company in 2007.

By 2009, it was back on the public market and competing with the likes of Family Dollar and Dollar Tree, Inc (NASDAQ:DLTR). These brands are one in the same and account for another 15,000 dollar stores around the country.

Where these stores succeed is typically in small towns with populations under 20,000. In fact, these small towns make up 75 percent of the company’s retail footprint. And it mostly serves lower income customers, although it’s experimenting with ways to reach higher-value clientele.

The company launched popshelf to focus on discretionary products that appeal to more affluent customers. It’s aiming these stores at middle-income families earning between $50k and $125k per year.

These experiments could put it at odds with the major retailer it managed to co-exist with through the decades: Walmart Inc (NYSE:WMT).

Is Dollar General Stock A Buy?

Dollar General Corp has been trading at an earnings multiple of around 21x most recently. Share prices fell to a 52-week low of $125.00, but quickly rebounded and climbed over $200 per share by the end of 2020.

DG pays a quarterly cash dividend of $0.36 per share, and it spent nearly $1 billion on dividends and share repurchases in the fiscal third quarter. That brought its share repurchases to about $2.5 billion for the year.

The company’s third quarter 2020 earnings report showed a 17.3 percent year-over-year increase in net sales. Profits for the quarter of $773.1 million represents a 57.3 percent increase from the same quarter in 2019.

It beat earnings estimates in every quarter of 2020, and that drove the market valuation to a historic high. And the company carries necessities, like toilet paper and trash bags, that were essential during the pandemic.

But no matter how well it does, it is struggling to break into a more affluent market segment. This has bearish investors warning about the risks of investing in Dollar General.

Risks Of Buying Dollar General Stock

Dollar General has a savvy business model that’s both a gift and a curse. It targets small towns with low populations that can’t necessarily support a full Walmart Supercenter. That’s the secret to its successes to this point, but it’s also a limiting factor.

There are only so many towns just small enough to avoid a Walmart but big enough to support a dollar store. This is why the company is trying to also court higher-income shoppers, and that’s a red flag that growth potential may be limited.

Popshelf isn’t guaranteed success – it could prove to be a massive failure. It’s an entirely new exercise in branding that could create drag on the company’s overall profits. And it’s not just Walmart’s toes being stepped on.

Dollar General now has wars to fight between other stores in its niche, along with specialty stores like Party City and even Target (TGT) now that it’s trying to pull higher-value customers.

Will Dollar General Beat Its Rivals?

Going back to the small towns, Dollar General’s footprint isn’t much bigger than Dollar Tree/Family Dollar. Nor is there any competitive difference in their overall business models, as they both serve underserved communities.

This means the market is saturated with these discount stores, and much of the foot traffic is attributed to the pandemic. Unemployment is high, and the perception of savings makes this a great place to stop when you’re pinching pennies.

Of course, the demand for discretionary purchases at popshelf may be subdued by the recession. Social media is filled with stories of parties being shut down, and both protests and riots occurred throughout the country.

Dollar General is not impervious to market conditions. And it seems like it’s only a matter of time before Walmart (WMT) and Amazon (AMZN) figure out how to compete with it.

Small town America can still order online, and the pandemic push to ecommerce leaves the market wide open for new competitors. The face of retail is changing, and it’s going to take a major investment in technology to keep up.

Is Dollar General Stock A Buy? The Bottom Line

Dollar General is an American discount retail chain with a wide footprint across small towns in rural America. It doubled its store count (and market valuation) over the past decade by targeting underserved markets too small for a Walmart (WMT) or Target (TGT).

This strategy built a solid brand reputation, especially among lower-income families.

Now it’s expanding to penetrate deeper into the upper middle class with a new popshelf concept. This opens new possible revenue streams if it can prove itself successful. Unfortunately, there’s no guarantee it will replicate the same success, and it may find limited growth soon.

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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.