Prognosticating the Future Position of Dollar General Shares in the Next 12 Months
Prognosticating the Future Position of Dollar General Shares in the Next 12 Months
Around twelve months ago, things were looking good for Dollar General shareholders. The stock was trading around $150 per share. However, it has since fallen by more than 50% from its 2024 highs, and the downward trend has worsened following the U.S. presidential election, despite the general upward trend in stocks.
The past five years have been successful for the S&P 500, with the index increasing by nearly 100%. Yet, Dollar General stock has dropped by approximately 50% during this period.
So, where might Dollar General stock be in a year's time? Although investors cannot provide a definitive answer, some general observations can help paint a picture, which may bring about a sense of optimism.
What's happening with Dollar General?
Dollar General is encountering several challenges. Sales are declining and profits are suffering significantly.
One aspect that I admire about Dollar General's business is that it operates over 20,000 stores mainly in small-town America, often serving as the only shopping option in town. However, this advantage also comes with a disadvantage - 60% of its customer base earns less than $35,000 per annum. This low-income demographic is currently struggling to afford even necessities, let alone discretionary items.
Dollar General's net sales in the first half of its fiscal 2024 rose by only 5% compared to the same period in fiscal 2023. Furthermore, the company's gross margin marginally decreased due to price cuts, damaged merchandise, and increased theft. Consequently, net income has reduced by 25% this year.
In an attempt to revitalize the business, Dollar General reinstated its former CEO, Todd Vasos, about a year ago. Changes initiated by Vasos include eliminating most self-checkout facilities to reduce theft, decreasing inventory, and optimizing the supply chain for improved efficiency.
Although these measures may be necessary, they are costly. Dollar General invested approximately $700 million in capital expenditures alone during the first half of the year. Vasos hopes that these changes will foster profit improvements in 2025.
Where will Dollar General be in a year?
Firstly, I should acknowledge that shares of Dollar General and its competitors have decreased since Donald Trump's election. The reason for this is Trump's stance on import tariffs. Essentially, these companies source their inventory from China, which might become more expensive if tariffs rise.
Nonetheless, it's essential to consider the context. Tariffs on Chinese imports increased during Trump's first term, yet Dollar General's profits still managed to grow. The chart below demonstrates Dollar General's profit performance during these four years.
As shown in the chart, Dollar General's profit margin dipped before increasing once again in 2020. These figures fall within the usual long-term range, so I would not anticipate any foreign policy changes to pose an insurmountable challenge for the company.
In relation to another issue being addressed by Vasos, Dollar General's inventories have grown faster than revenue in recent years. This implies that management was overstocking products, which eventually leads to profitability issues. As the chart below shows, its profit margin peaked right before inventory growth surpassed revenue growth.
This is just one example that highlights that Dollar General is addressing the appropriate issues. If it can resolve its known problems, and tariffs are an overblown concern, then it's reasonable to expect Dollar General's profits to start showing signs of improvement in 2025.
This is an intriguing prospect for investors. After all, at a price-to-sales ratio of 0.4, Dollar General stock is at its cheapest historically.
The low valuation of Dollar General stock is due to low expectations of improvement in the business. However, if its profits do indeed improve in 2025, then the valuation could double as investor expectations upgrade.
It's essential to note that Dollar General does not need to fully turnaround its business before investors regain their optimism. The company merely needs to demonstrate that its strategies are working and that it's on the path to recovery.
I believe that Dollar General is addressing the right issues and thus, I consequently believe it will show signs of improvement within the next year. For this year, I believe Dollar General stock will outperform the S&P 500 over the next 12 months, at least.
Of course, predicting this is easier said than done - issues such as the lack of discretionary income among much of its customer base are beyond its control. However, with Dollar General stock, it pays to be patient - literally. The dividend yield currently stands at over 3% for the first time ever, and it has room to rise further, adding another incentive for buying and holding today.
Given Dollar General's current challenges, such as declining sales and profits, as well as the financial impact of its efforts to improve the business through costly measures, it's crucial for investors considering investing in Dollar General to have a long-term perspective.
If successful in resolving its known issues and demonstrating a path to recovery, Dollar General's stock could potentially attract positive investor sentiment, potentially leading to an increase in its valuation. This, coupled with its high dividend yield, makes Dollar General a potential consideration for income-focused investors seeking patient long-term gains.