Dollar General (NYSE: DG) showcased resilience during the onset of the pandemic, with open stores attracting a surge of eager shoppers on the prowl for affordable essentials like paper towels at bargain prices.
Alas, the tides have turned. The stock witnessed a discouraging downturn, shedding approximately 39% since the dawn of 2023, a stark contrast to the S&P 500’s robust 37% climb during the same period.
However, beware – the dip in stock price does not signify a golden buying opportunity. Here are three pivotal reasons why you should steer clear of these shares.
Image source: Getty Images.
1. Struggling Sales
Despite aiming to captivate a price-conscious consumer base, Dollar General’s sales have faltered. In the realm of retail, a crucial metric is same-store sales (comps) – a category where Dollar General has been underperforming.
While foot traffic has seen an uptick, customers are spending less per visit, spelling trouble for the company’s bottom line. The lackluster performance of Dollar General’s fourth-quarter comps, with a modest 0.7% growth, represents a recurring trend that spells caution.
Furthermore, customers today have an array of competitive value options at their disposal, including retail giants like Amazon and Walmart, who leverage their sheer size to offer unbeatable prices, posing a formidable challenge to Dollar General.
2. Shrinking Margins
Dollar General’s increasing emphasis on consumables like paper towels and toilet paper, while intended to lure customers, comes at a cost – lower profit margins compared to other product categories.
This shift is evident in the numbers, with consumables accounting for a higher proportion of Dollar General’s sales – a spike from 80% in the previous year to 77% in fiscal 2021. Moreover, factors like escalated shrinkage and necessary inventory markdowns have further squeezed the company’s gross margin.
Rising operational expenses and an inability to pass these costs to customers have consequently pummeled profits, with the company reporting a dismal over 38% plunge in fourth-quarter diluted earnings per share (EPS) to $1.83.
Management’s outlook for the year offers little solace, projecting flat to a 10% dip in EPS, hinging on scale comps improvement of 2% to 2.7%.
3. Detrimental Cash Management
Dollar General’s increased capital expenditures on store expansions and remodels are a gamble with an uncertain payoff amidst stagnant sales.
The company’s decision to halt share repurchases after once allocating $2.7 billion for buybacks underlines a cautious approach, amid an ambitious plan to open 800 stores, execute 1,500 remodels, and relocate 85 outlets this year. With weak comps threatening this expansion strategy, proceeding with caution is prudent.
Despite a modest market reception to the fourth-quarter results, driven by traffic growth, relying heavily on low-priced, low-margin products is not a sustainable model for Dollar General’s success. Investors would be wise to divest from these shares and explore more promising opportunities elsewhere.
Should you invest $1,000 in Dollar General right now?
Before diving into Dollar General stock, it’s pivotal to note that the Motley Fool Stock Advisor analysts have pinpointed what they deem the 10 best stocks for potential investors, omitting Dollar General. These selected stocks harbor the potential for substantial returns in the years to come.
Stock Advisor equips investors with a strategic roadmap to success, offering guidance on portfolio construction, expert insights, and bimonthly stock recommendations that have outpaced the S&P 500’s performance by more than triple since 2002.
*Stock Advisor returns as of March 25, 2024