Less than a year ago, things were good for Dollar General(NYSE: DG) shareholders. The stock traded around $150 per share. But it has now dropped more than 50% from its highs in 2024 and the sell-off has gotten worse since the U.S. presidential election even though stocks are generally soaring.
Moreover, it's been a great five-year run for the S&P 500, with the index up close to 100%. But Dollar General stock is down about 50% during this time.
So where will Dollar General stock be one year from now? While investors can't have a precise answer to this question, I believe some general observations can lead to a ballpark idea. And it could be reason for optimism.
What's going on with Dollar General?
Dollar General is facing headwinds. Sales are struggling and profits are down big.
One reason I like Dollar General's business is that it operates over 20,000 stores largely across small-town USA, which can often be one of the only shopping options in town. But the flip side of this benefit is that 60% of its customer base makes less than $35,000 annually. This low-income demographic is struggling to even buy the necessities, let alone discretionary purchases.
Dollar General's net sales in the first half of its fiscal 2024 were only up 5% from the comparable period of fiscal 2023. And the company's gross margin was slightly down as management cut prices, merchandise got damaged, and theft rose. Net income has consequently dropped 25% this year.
Dollar General brought back its former CEO, Todd Vasos, about one year ago to try to get the business back on track. His changes include getting rid of most of the company's self checkout to reduce theft, reducing inventory, and reimagining the supply chain for greater efficiency.
These moves may be the right ones, but they cost money. Dollar General spent about $700 million on capital expenditures in the first half of the year alone. Vasos hopes the moves start paying off with profit improvements in 2025.
Where will Dollar General be in one year?
Before going further, I should acknowledge that shares of Dollar General and its peers are down since Donald Trump was elected. The reason for this is Trump's expressed views on import tariffs. In short, these companies get inventory from China. And this merchandise could get more expensive with higher tariffs.
It's a concern. But for perspective, tariffs on imports from China went up during Trump's first term as well. The chart below shows how Dollar General's profits performed during those four years.
DG Gross Profit Margin data by YCharts
As the chart shows, Dollar General's profit margin did gradually dip before rising again in 2020. But these metrics were well within normal long-term ranges. Therefore, I wouldn't expect any foreign policy changes that would be an insurmountable challenge for the company.
Turning to another problem being addressed by Vasos, Dollar General's inventories had risen faster than revenue in recent years. This indicates that management was overstocking products, which eventually does lead to problems in profitability. As the chart below shows, its profit margin peaked right before inventory growth surpassed revenue growth.
DG Inventories (Quarterly) data by YCharts
This is one example that illustrates that Dollar General is working on the right problems. If it can address its known problems and if tariffs are an overblown fear, then it's reasonable to expect Dollar General's profits to show signs of improvement in 2025.
That's a tantalizing proposition for investors. After all, at 0.4 times sales, Dollar General stock is the cheapest it's ever been in its history.
DG PS Ratio data by YCharts
The low valuation for Dollar General stock is due to low expectations for improvement with the business. But if its profits indeed improve in 2025, then the valuation could double as investors' expectations get an upgrade.
It's important to note that Dollar General doesn't need to fully fix its business before investors become optimistic again. The company simply needs to demonstrate that what it's doing is working and that it's on the right path to recovery.
I believe that Dollar General is working on the right problems and 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, timing all of this is easier said than done -- the lack of discretionary income among much of its customer base in particular is an issue outside of its control. But with Dollar General stock, it fortunately pays to be patient -- literally. The dividend yield is currently over 3% for the first time ever and has room to rise further, which is another incentive to buy and hold today.
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Jon Quast has positions in Dollar General. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
