To The Moon

$Dollar General(DG)$

Earning Overview

In 2024, Dollar General reported an EPS of $5.11. For 2025, management expects a minimum EPS of $5.10, though that’s on the lower end of projections. On the higher end, they anticipate earnings could reach up to $5.80. If the company hits the top end of its guidance, that would reflect nearly 14% year-over-year growth.

Looking further ahead, Dollar General’s management is projecting annual EPS growth of at least 10% starting in 2026. While some of this growth will likely be driven by stock buybacks, there’s also significant potential to improve profit margins and boost EPS in that way.

Under this long-term outlook, it’s possible for Dollar General’s EPS to double within the next five to seven years. This assumption seems entirely plausible. Even if EPS doubles from 2024 levels, it would still fall short of its previous all-time high.

In short, profit growth is a key focus, and Dollar General is forecasting strong, yet realistic growth. The forecast is grounded in achievable goals, as the business has seen similar profits in the past.

Fundamental Analysis

If Dollar General grows its EPS by 10% annually through 2027, it would reach an EPS of $6.80 by then. At its current price, investors are paying just 12 times those projected earnings.

This is on the conservative side. If Dollar General surpasses the 10% annual growth rate, the stock would be even more attractively priced. Additionally, the stock offers a dividend yield of nearly 3%, which is at a record high. In other words, investors are receiving a solid return while waiting for profit growth to materialize.

Dividend Yield: Dollar General offers an annual dividend of $2.36 per share, yielding approximately 3.29%

Growth Prospects: Despite recent challenges, including a 70% stock decline since 2022 and halved earnings, Dollar General plans to open approximately 575 new stores in 2025 and remodel around 2,000 existing locations. This strategic expansion aims to strengthen the company's market position and drive future growth.

Guidance

Dollar General's profit challenges stem from its declining gross margin, which has dropped in recent years due to inventory issues. Simply put, the company ended up with excess stock, leading to more damage, theft, and the need for markdowns. The chart illustrates how its current gross margin is significantly lower than its historical average.

In fiscal 2024, Dollar General posted net sales exceeding $40 billion. At such a large scale, even small changes in gross margin can have a disproportionate impact on overall profitability.

The good news for shareholders is that Dollar General is making strides. For example, in the third quarter of 2024, the company saw a modest improvement in theft levels, and in the fourth quarter, the improvement was even more significant. Management expects this positive trend to continue throughout 2025.

It’s unrealistic to expect businesses to be free of problems—they’re bound to face challenges. However, businesses that can overcome those challenges deserve attention. Dollar General has faced tough times, but after more than a year of addressing these issues, it is now starting to show signs of recovery. This is promising news.

Free Cash Flow

Operating Cash Flow: Dollar General typically generates a robust operating cash flow, which reflects the cash generated by its core business activities. This allows the company to reinvest in stores, expand its footprint, and fund day-to-day operations. In 2024, Dollar General reported substantial operating cash flow, which supported its continued growth and ability to weather challenges like inventory issues.

Free Cash Flow: After accounting for capital expenditures (CapEx), Dollar General still generates significant free cash flow. This metric is crucial because it shows how much cash the company has left over after investing in its operations, which can be used for stock buybacks, debt reduction, and dividends. In recent years, DG has maintained strong free cash flow, indicating solid financial flexibility.

Capital Expenditures: DG invests heavily in new store openings, renovations, and technology improvements, which require capital spending. Despite these investments, the company has been able to generate strong free cash flow due to the scale and efficiency of its operations.

Dividend Payments: Dollar General has a track record of paying regular dividends, supported by its healthy cash flow. The dividend yield is currently attractive, and the company’s ability to generate cash flow ensures that it can continue to return capital to shareholders.

Risks and Challenges

Inventory Management Issues

One of the most significant challenges for Dollar General in recent years has been managing its inventory effectively. The company has faced excess inventory, which has led to increased damage, theft, and the need for markdowns. While progress is being made, inventory management remains a critical risk that could impact profitability if not handled properly.

Competition in the Discount Retail Sector

Dollar General operates in a highly competitive industry with several well-established competitors, including Walmart, Dollar Tree, and regional chains. These competitors have similar product offerings, and some, like Walmart, have more extensive resources and scale, which can exert downward pressure on prices and margins. This competition could impact Dollar General’s ability to maintain or grow market share.

Economic Sensitivity

Dollar General’s performance is closely tied to the health of the economy, particularly the purchasing power of lower- and middle-income consumers. In times of economic downturn or rising inflation, its customer base may be more financially strained, potentially reducing discretionary spending. While Dollar General is often considered a “recession-proof” retailer, it still faces risks from macroeconomic trends, such as inflation, interest rates, and unemployment.

Saturation and Market Expansion

Dollar General has been aggressively expanding its store base, particularly in rural areas. While this strategy has been effective in driving growth, there is a risk of market saturation. As the company opens more stores, finding new, profitable locations that provide adequate returns could become more difficult. Additionally, overexpansion could strain resources and reduce the returns from new stores.

Valuation

Institutional Investors: Large institutional investors generally have a favorable view of Dollar General due to its strong financials and reliable cash flow. The company is considered a safe and stable investment for long-term portfolios.

Market sentiment

Caution Due to Economic Concerns

Economic Sensitivity: While Dollar General is often seen as a "recession-proof" retailer, it is not completely immune to macroeconomic headwinds. Concerns over rising inflation, interest rates, and potential slowdowns in consumer spending have led to some caution. Investors are wary of how the broader economy may affect Dollar General's customers, many of whom are more price-sensitive.

Competition and Pricing Pressure: Dollar General faces intense competition from larger retailers like Walmart, regional dollar stores, and e-commerce giants. This competition can impact both its market share and pricing power. Any pressure on margins could lead to lower-than-expected profitability, which would hurt investor sentiment.

Supply Chain and Labor Costs: Rising supply chain costs, labor shortages, and increasing wages could weigh on Dollar General’s profitability. These factors add uncertainty to the stock’s outlook, making some investors cautious about the potential impact on margins.

Conclusion

There are concerns about the broader economy, which has contributed to the recent dip in the S&P 500. However, Dollar General has historically performed well during challenging economic times. I expect this trend to continue, making its current stock price an attractive opportunity.

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

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