We came across a bullish thesis on Dollar General Corporation (DG) on Enterprising Investor’s Substack by Tyler Moody. In this article, we will summarize the bulls’ thesis on DG. Dollar General Corporation (DG)’s share was trading at $80.38 as of Oct 25th. DG’s trailing and forward P/E were 12.50 and 12.36 respectively according to Yahoo Finance.
Dollar General (DG) has experienced a steep 70% decline since its 2022 peak, now trading at $80 with a market cap of just under $18 billion. As a discount retailer focused on rural areas, DG operates around 20,000 stores, typically serving customers with annual incomes below $35,000. This customer base often makes small purchases, with average tickets under $15. The stock’s sharp decline reflects weakened consumer demand from lower-income shoppers, which has pressured growth and compressed margins. Despite recent challenges, Dollar General has maintained consistent revenue growth over two decades, increasing sales by 2.6% over the last year, albeit slower than historical rates.
Dollar General’s gross margins have stayed around 31% for the past decade, yet its operating margins have deteriorated, falling from a high of 10.5% in 2020 to just 5.3% over the past year. Some investors view this margin compression as a temporary effect of soft consumer demand, anticipating a potential return to historical margin levels as demand stabilizes.
For valuation, DG’s management projects 5% sales growth this year, which implies approximately $40.6 billion in revenue. Applying a 7% medium-term operating margin, DG could generate an estimated operating income of $2.84 billion and, after taxes, a net income of $2.22 billion. Using a 7% discount rate, the resulting enterprise value approximates $31.7 billion, and, after accounting for DG’s cash and debt, implies an equity value of $25.9 billion, or about $118 per share—significantly above its current trading price.
The bullish thesis is based on the expectation that Dollar General’s recent challenges with low-income shoppers, impacted by inflation and reduced purchasing power, are temporary. As economic conditions stabilize, consumer demand should improve, enabling Dollar General to recover its margins and regain profitability.
Dollar General Corporation (DG) is also not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 42 hedge fund portfolios held DG at the end of the second quarter which was 49 in the previous quarter. While we acknowledge the risk and potential of DG as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than DG but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.