Why Dollar General Corp. (DG) Stock Is Only Good When Things Are Bad

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Dollar General Corp. (NYSE:DG), the store for people who can’t get to a Wal-Mart Stores Inc (NYSE:WMT) regularly, has gone nowhere in the three months since it last reported earnings. The fourth-quarter report, due Mar. 16, is expected to show improvement, $1.41 per share of earnings on $5.98 billion in revenue, but whether that ends the carping for DG stock remains to be seen.

Why Dollar General Corp. (DG) Stock Is Only Good When Things Are Bad

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Since hitting an all-time high of $96.71 per share last July, Dollar General has lost nearly 20% of its value.

Its top line seemed to stall at $5.3 billion, and its performance over the last year trails low-cost retailing rivals Fred’s, Inc. (NASDAQ:FRED), Big Lots, Inc. (NYSE:BIG) and even Dollar Tree, Inc. (NASDAQ:DLTR), which won a bitter takeover battle against it for Family Dollar.

If the Dollar General earnings meet expectations, DG stock could gap up, just as it gapped down after the July earnings disappointed.

DG Stock: A Contrary Bet

Analyst views on Dollar General tend to run contrary to their views on the economy.

If you think happy days are here, you may not like DG stock. If you’re worried, like Richard Band, you may like it a lot. The trend among analysts, however, has been to move Dollar General from a buy to a hold, as they think the recovery will continue.

DG is a very misunderstood company. Some analysts lump it in with Dollar Tree, whose dollar stores fit well in middle-class strip malls. Others class it alongside Walmart, whose stores are too big to serve Dollar General’s niche.

Simply put, DG serves poor people. Most of its outlets tend to be in the food deserts of big cities or in towns too small to use a bigger store. For many people, it’s a retailer of last resort, one reason it had a growth runway during the low, slow climb out of the last recession.

Dollar General serves these customers well. The stock is customized for the location. You will find pork rinds only where there are customers who like pork rinds. Where it’s legal,the company sells tobacco, beer, wine and even hard liquor. These innovations kept sales, and DG stock, rising throughout the recovery.

Dollar General averages 30% gross margins on its inventory, against 25% for Walmart and a miniscule 13% for Costco Wholesale Corporation (NASDAQ:COST). The margins are still smaller than small merchants can live with, the stores smaller than any Walmart can profitably build, and this gives Dollar General a nice business.

Happy Days Are Bad for Dollar General

The problem occurs when the economy recovers. With unemployment at 4.7%, many of DG’s target customers can afford cars and trips to Walmart. The better the economy, the smaller its opportunity, and vice versa.

That may be why Dollar General disappointed on earnings last summer, leading to a shareholder suit from specialist law firms and a sharp drop in DG stock. If the economy is as good as the Administration says, the current earnings estimates may be high. 

Bottom Line on DG

The bottom line is that Dollar General is a good hedge against an economic downturn. By the same token, it’s a bad stock to hold in good times.

If DG beats estimates, shares will likely rise from their present price-to-earnings ratio of 17, and the dividend of 25 cents yields just 1.37%, which makes it a bad bargain for income investors.

But if you believe we’re heading into another recession, for whatever reason, consider speculating on Dollar General, especially if it misses on earnings. That will drive DG stock down again and give your money a good place to hide from the next economic downturn.

Dana Blankenhorn is a financial and technology journalist. He is the author of the sci-fi novella Into the Cloud, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he did not hold a position in any of the aforementioned securities.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Tweet him at @danablankenhorn, connect with him on Mastodon or subscribe to his Substack.


Article printed from InvestorPlace Media, https://investorplace.com/2017/03/dollar-general-corp-dg-stock-only-good-when-bad/.

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