Can we expect Dollar General to continue rising?

dollar plain (NYSE:DG) had a brutal year in 2023, with its stock plummeting 44% on a year when the S&P 500 was up about 24%. The retailer faced a number of problems, from fines for safety violations to executive turnover and low profit margins, all of which caused Dollar General’s stock price to plummet.

Even including the disastrous 2023, it’s still averaging 10.6% annual turnover over the past decade as of March 14, an unusually bad turnaround for the company, which has traditionally been a steady and solid performer. Valuations are too low and they are coming back. The stock seemed poised for a rebound when CEO Todd Vasos returned to his corner office. Vasos previously served as CEO of Dollar General from 2015 to 2022, a period of tremendous growth.

The discount retailer is off to a strong start to 2024, but its stock price has fluctuated significantly following its fourth-quarter results and 2024 outlook on Thursday. Dollar General rose about 6% in early trading to about $168, but fell back to about $151 per share by mid-morning. This volatility is likely related to the retailer’s mixed outlook for 2024.

back to basics

Even though Dollar General performed better than analysts expected, its fourth-quarter numbers weren’t particularly impressive. Net sales for the quarter decreased 3.4% year-over-year to $9.9 billion, while same-store sales increased 1%.

However, the numbers are slightly skewed because there were fewer week periods last quarter compared to the fourth quarter of 2022. Some store closures also impacted net sales, but were somewhat offset by increased same-store sales.

Dollar General’s expenses rose 5% to $2.3 billion, or 23.6% of net sales. This increase is due in part to our “Back to Basics” strategy to improve operations from a customer perspective, which has resulted in increased labor costs, increased repair and maintenance costs, and more.

This resulted in a 38% decline in the company’s bottom line, with operating income falling 38% to $580 million, and net income falling by a similar percentage to $401 million, or $1.83 per share. But despite the decline, the results were still better than the $1.75 per share analysts had expected.

“We made solid progress executing our ‘back to basics’ strategy, which we believe supported our improved operating performance during the quarter,” Vasos said. “While we are pleased with the operational improvements we have seen, we believe significant opportunities remain as we continue to focus on improving how we support our teams and serve our customers.”

So while Dollar General reported solid, if not eye-popping, numbers, Thursday’s volatility likely had more to do with its outlook.

slow and steady progress

The turnaround strategy led by Vasos will begin to pay off throughout 2024, especially in the second half of the year.

For the first quarter, the company expects same-store sales to increase 1.5% to 2%, a modest but improved year-over-year improvement in the fourth quarter. But Dollar General also expects it to be its worst quarter of 2024.

“While we expect the first quarter to be pressured by the lowest projected same-store sales growth of any quarter in fiscal 2024 and the annualization of prior-year headwinds such as retail workforce and declines, we remain focused on delivering as best we can. Our full-year plans include strong EPS growth expected in the second half of the year,” Chief Financial Officer Kelly Dilts said in the earnings report.

The full-year outlook projects same-store sales growth to increase from 0.2% to 2% to 2.7% in 2023. Meanwhile, net sales growth is expected to range from 0.2% to 6% to 6.7% in 2023. 2.2% in fiscal year 2023.

However, 2024 earnings per share are expected to be between $6.80 and $7.55, which would be similar to 2023 at the high end. This assumes higher compensation costs and tax rates, and suggests Dollar General’s profit margins could be pressured by higher costs.

The company also plans capital expenditures of $1.3 billion to $1.4 billion, including the launch of approximately 800 new stores, 85 relocations and 1,500 remodels.

Is it time to buy?

The net sales outlook is better than analysts expected, but the revenue figure only meets the consensus estimate of $7.55 per share if Dollar General hits the high end of its range. These uncertain earnings forecasts may have been the cause of Thursday’s volatility.

Prior to Thursday, Dollar General stock was up about 16% year to date, closing at $158 on Wednesday. The increase has also boosted its valuation, and it now trades at 21x earnings, up from 13x last fall.

I think Dollar General is moving in the right direction, but given its earnings outlook, I’m not sure we’ll see much more growth beyond the 13% rise it had prior to Thursday, at least over the next few quarters. It might alleviate some of today’s negative overreactions, but not by much. However, Dollar General is definitely a long-term hold and an asset that interested potential buyers may check back in the second half of the year.