After spending decades as a publicly traded entity, the discount retail giant Dollar General (NYSE: DG) underwent a brief stint as a private company in 2007, only to reenter the public markets in 2009. For those who invested $1,000 in its 2009 initial public offering (IPO), the returns have been extraordinary, reaching nearly $7,000 today. It has undoubtedly been a stellar performer, consistently outpacing the market.
However, the narrative took a different turn in 2023. Up until the close of 2022, Dollar General had weathered its biggest drop, a modest 31%, and substantial pullbacks of 20% or more were infrequent. Yet, in 2023, shareholders experienced a significant downturn, with shares plummeting a staggering 61% from their previous highs, marking a challenging period for investors.
The notable and unprecedented decline in Dollar General’s stock value requires a closer examination. Despite achieving an all-time high in trailing-12-month sales at $39 billion, the company does not seem to be losing consumer interest. Instead, the recent hit to its profit is the key factor behind the stock’s decline.
For instance, Dollar General’s earnings per share in the third quarter of 2023 plummeted to $1.26, marking a significant 46% drop compared to the same period in the prior year. In essence, the most substantial drawdown in Dollar General’s stock during 2023 can be attributed to a significant erosion in profitability.
In October, the stock reached a low of $102 per share. However, since bottoming out, it has experienced a remarkable rebound of over 40%. The question arises: Is this recovery too swift, or does it signal potential future gains? To address this query, I will delve into my expectations regarding Dollar General’s profit trajectory in 2024 and beyond.
Where Dollar General stock is going from here
Dollar General didn’t turn a blind eye to its profitability challenges; it recognized the need for leadership changes. Todd Vasos, who served as the company’s CEO from 2015 through late 2022, was brought back in October. Additionally, the executive vice president of store operations was replaced in January.
Acknowledging the critical issue that needs addressing, Dollar General’s management, comprising both new and familiar faces, has identified the root cause: inventory management. Excessive inventory in the back leads to damage, while too much stock on shelves elevates the risk of theft. The rapid reduction of oversupply necessitates selling products at discounted prices, impacting profitability.
Crucially, it’s important to note that Dollar General doesn’t suffer from a demand problem, evident in its all-time high net sales. While same-store sales may have dipped by 1% year over year in 2023 (awaiting confirmation in the upcoming full-year financial results on March 14), this is a reasonable scenario, especially considering the 4% increase in same-store sales witnessed in 2022.
Looking ahead, there’s a reasonable expectation for Dollar General’s same-store sales to rebound in 2024. The company has historically attracted consumers when budgets are tight, and several indicators suggest the current strain on U.S. consumers.
Assuming Dollar General effectively addresses its inventory challenges in the coming year, which is entirely plausible, a reasonable anticipation is the rebound of its profit margins. Considering historical trends, there’s a credible expectation for the company’s margins to surpass the 6% mark once again.
If Dollar General manages to restore its profit margins by overcoming its inventory challenges, the company could potentially achieve an annual EPS in the range of $10 to $11 based on its existing share count. Assuming a price-to-earnings ratio of 20, a valuation it has commonly attained in the past, the stock could surge beyond $200 per share. This implies an additional upside of approximately 40% from its current trading levels.
It’s crucial to acknowledge that there are inherent uncertainties and numerous “ifs” in this scenario. However, the overarching argument remains valid: When Dollar General experienced a decline, its shares entered the realm of deep value. While the stock has already seen a considerable rebound, successful resolution of the company’s challenges could pave the way for substantial growth in Dollar General’s stock throughout 2024 and beyond.
