We recently compiled a list of the 7 Best Department Store Stocks to Buy Now. In this article, we are going to take a look at where Dollar General (NYSE:DG) stands against the other best department store stocks to buy now.
Holiday Shopping Season and Consumer Sentiment
The holiday shopping season is in full swing in the United States. On December 2, Jessica Moulton, senior partner at McKinsey & Company, appeared on CNBC to discuss Black Friday spending and its effects on consumer sentiment. She said that while 2024 was a challenging year for retailers, the numbers rolling in from the holiday season seem promising. High hopes were especially placed on Black Friday sales, and while the numbers aren’t all in, they look pretty good. This trend holds particularly true online, where sales seem to be up by 15% or so compared to last year in many markets. According to CNBC, the total Black Friday e-commerce spending was around $10.8 billion. However, Moulton said that footfall in stores wasn’t so good, and continued to be flat year-over-year.
She said the trends in the sector are changing, with around 75% of shopping journeys starting online at the outset. Although some of them end up with consumers paying visits to the brick-and-mortar stores, much of the shopping journeys end with sales happening online. Furthermore, the retail sector is showing consumer behavior that tends to undertake a multiple retailer journey these days. If it is a bigger purchase, most consumers prefer checking out four to five retailers, either online or offline. This poses a significant change in the sector as compared to around two decades ago.
Is Black Friday Becoming the Biggest Thing in Retail?
Moulton said that consumers have consistently shown the industry in many ways that they are experiencing the effects of the cost of living crisis. However, recent survey data by McKinsey shows that consumers have started to feel more confident, which is expected to be reflected in the busier Christmas period this year compared to the last couple of years. She is optimistic about the future, saying that although we are still in a tricky place, there is light at the end of the tunnel. McKinsey’s estimates show that around 63% of consumers are expected to have an increased e-commerce spending forecast this holiday shopping season. The e-commerce spending forecast for around 27% of consumers is expected to remain the same, while it may decrease for 4% due to cutbacks.
Black Friday and Cyber Monday are increasingly becoming more significant in the holiday shopping season, especially compared to Christmas shopping. Mouton said that the retail industry is seeing more and more concentration of sales in the days around Black Friday. That is tough for retailers, as it puts a significant amount of weight on the fairly narrow set of items that retailers work hard to put great deals against. The retail results for the 29th November weekend mark the culmination of nine months of work by most retailers. This includes sourcing good value, marketing their items, watching the trends in the days before the weekend itself, detecting the items getting more traffic, and more. Since the changing trends keep concentrating more and more sales in the precious Black Friday weekend, the stakes are high for retailers.
Generative AI and Retail
Talking about the increasing role of generative AI in retail, Moulton said considerable experimentation is going on in the industry. However, she considers the present time to be too early to see it at scale. She said that several leaders are leveraging generative AI the right way, which means that the strongest are getting stronger. They are taking early advantage of such new capabilities. This holds special importance since cookies are now much less easy to use because of their increased regulation. This makes Gen-AI a substitute that leaders are leaning into.
Our Methodology
We sifted through stock screeners and financial media reports to compile a list of 10 department store stocks. We then selected the 7 stocks that were the most popular among elite hedge funds, as of Q3 2024. The list is sorted in ascending order of hedge fund sentiment.
Why do we care about what hedge funds do? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
Dollar General Corporation (NYSE:DG)
Number of Hedge Fund Holders: 45
Dollar General (NYSE:DG) offers an elaborate array of merchandise in its stores, including home products, consumables, seasonal items, apparel, and more. Its merchandise collection includes its own private brands and brands from manufacturers.
Dollar General (NYSE:DG) is operating on a profitable model. Its net sales grew by 5% to $10.2 billion in fiscal Q3 2024. The company grew its market share in both dollars and units in highly consumable products and non-consumable product sales during the quarter. Its same-store sales also rose by 1.3%, and this growth was attributed to 1.1% growth in the average transaction amount, including the average unit retail price per item and the increase in average items per basket. The comparable sales were driven entirely by Dollar General’s (NYSE:DG) growth in the consumable category, as its customers are continually focusing on spending on essential items of need.
The company is also focusing on maintaining a mix and balance in its inventory to boost sales and improve stock levels. Through fiscal Q3 2024, the business generated cash flows of $2.2 billion from operations, an increase of 52% due to improvements in Dollar General’s (NYSE:DG) working capital position, mainly through inventory management.
The company’s primary priority is investing in its business, including its existing store base and organic growth opportunities, such as strategic initiatives and new store expansion. It is on track to deliver around 2,435 real estate projects this year, including 1,620 remodels, 730 new stores, and 85 relocations.
Overall, DG ranks 5th among the 7 best department store stocks to buy now. While we acknowledge the potential of department store stocks, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. 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 is originally published at Insider Monkey.
