Can You Count on Dollar General to Keep Rising?

Dollar General (NYSE:DG) had a brutal year in 2023, as its stock price plummeted 44% in a year when the S&P 500 was up by about 24%. The retailer faced one problem after another, from fines for safety violations to executive turnover and lower profit margins, all of which kept Dollar General’s stock price in freefall.

It was an unusually bad turn for this traditionally steady and solid-performing company that, even including a terrible 2023, it still has an average annualized turn of 10.6% over the past 10 years as of March 14. With its valuation so low and returning CEO Todd Vasos back in the corner office, the stock looked poised for a turnaround. Vasos previously served as CEO from 2015 to 2022, which was a period of tremendous growth for Dollar General.

The discount retailer got off to strong start in 2024, but its stock price fluctuated wildly after its fourth-quarter earnings results and 2024 outlook on Thursday. Dollar General was up some 6% in early trading to around $168, but then it tumbled back to around $151 per share by mid-morning. The volatility was likely tied to the retailer’s mixed outlook for 2024.

Getting back to basics

The fourth-quarter numbers were not all that impressive, even though Dollar General performed better than analysts had expected. Net sales fell 3.4% year over year in the quarter to $9.9 billion, while same-store sales rose 1%.

However, the numbers were slightly skewed as this past quarter included one fewer week compared to Q4 2022. Some store closures also impacted net sales, although they were offset somewhat by the growth in same-store sales.

Dollar General’s expenses rose 5% to $2.3 billion or 23.6% of net sales. That increase was due in part to its “Back to Basics” strategy of improving operations from the standpoint of the customer, which involved higher labor costs and increased repairs and maintenance expenses, among other costs.

This dented the company’s bottom line, as its operating profit plunged 38% to $580 million while its net income dropped by a similar percentage to $401 million, or $1.83 per share. However, despite the drop, the result was still better than the $1.75 per share that analysts had expected.

“We have made solid progress executing on our ‘Back to Basics’ strategy, which we believe supported our improved operational performance during the quarter,” Vasos said. “While we are pleased with the operational improvement we have seen, we believe that significant opportunity remains, as we continue to focus on enhancing the way we support our teams and serve our customers.”

Thus, Dollar General reported solid, if not spectacular numbers, but Thursday’s volatility likely had more to do with the outlook.

Slow and steady progress

The turnaround strategy spearheaded by Vasos should start to pay off throughout the course of 2024, particularly in the back half of the year.

In Q1, the company expects same-store sales to rise by 1.5% to 2%, which is modest but an improvement from the fourth-quarter year-over-year gain. However, Dollar General also expects it to be the worst quarter of 2024.

“While we anticipate the first quarter will be pressured by our lowest expected same-store-sales increase of any quarter in fiscal 2024, as well as the annualization of prior year headwinds such as retail labor and shrink, we are focused on delivering our full-year plans, including anticipated strong EPS growth in the back half of the year,” said Chief Financial Officer Kelly Dilts in the earnings report.

The full-year outlook calls for same-store sales growth to be between 2% to 2.7%, up from 0.2% in 2023. Meanwhile, net sales growth is expected to be in the 6%-to-6.7% range, up from 2.2% in fiscal 2023.

However, earnings per share is projected between $6.80 and $7.55 for 2024, which would be similar to 2023 at the high end. This assumes higher compensation costs and tax rates and indicates that Dollar General’s profit margins could remain under pressure from higher costs.

Further, the firm is planning $1.3 billion to $1.4 billion in capital expenditures, including launching some 800 new stores, 85 relocations and 1,500 remodels.

Time to buy?

While the net sales projections are better than analysts expected, the earnings numbers only meet the consensus estimates of $7.55 per share if Dollar General hits the high end of its range. This iffy earnings forecast may have been the reason for the volatility on Thursday.

Prior to Thursday, Dollar General stock had been up by about 16% year to date, closing at $158 on Wednesday. With the increase, its valuation has climbed, and it is now trading at 21 times forward earnings, up from 13 last fall.

I think Dollar General is headed in the right direction, but given its earnings outlook, I’m not sure you’ll see much more growth beyond the 13% gain it had prior to Thursday, at least over the next couple of quarters. It could bounce a bit off today’s negative overreaction, but not a lot. However, Dollar General is certainly a long-term hold and one for interested potential buyers to check back in with in the second half of the year.