To say Dollar General (NYSE: DG) has fallen out of favor with investors is a considerable understatement. Down in price by nearly half since March's high (and lower to the tune of 34% just since late August), there's little apparent interest in owning the stock.
As the old adage goes, though, it's darkest before dawn. This weakness should be viewed as an opportunity to step into oversold shares of a company with a brighter future than most anyone sees. Here are four top reasons to buy the stock.
1. A so-so economy is ideal for its business model
Anyone familiar with the retailer likely knows Dollar General's core customers are less-than-affluent households. And for years, it worked. Plenty of U.S. consumers live on a budget. In some ways, a tight economy even gives the company a competitive advantage.
But things have been so tough lately that many of these customers are simply not shopping at all. Although last quarter's overall revenue was up 4.2% year over year, same-store sales only improved an anemic 0.5%. As CEO Todd Vasos lamented, "We believe the softer sales trends are partially attributable to a core customer who feels financially constrained."
Translation: Too many people are just plain broke. That's the key reason Dollar General's shares are down more than 30% since August.
The circumstances behind that one rough quarter, however, are seemingly already in the past. While hardly going like gangbusters, the Atlanta branch of the Federal Reserve believes the nation's third-quarter gross domestic product (GDP) grew at a pace of 3.2%, up from Q2's final reading. And although inflation is lingering, the Department of Labor reports wage growth grew 4% in September.
These aren't exactly robust numbers, but they're at least strong enough to send sticker-shocked shoppers back into Dollar General's stores.
2. Its best-possible CEO is back at the helm
The bulk of Dollar General's historic growth took shape largely under Todd Vasos's leadership. Between his appointment as executive vice president in 2008 and his resignation as CEO in 2022, the company's store count grew from less than 9,000 to over 20,000. While far from perfect, he clearly understands the business and the company. He largely made it what it is, after all.
And now he's back. After a year away, Vasos was rehired as the retailer's CEO in October of last year. He's still getting reacclimated, but that phase of his return should be winding down. From this point forward, look for better execution from the industry and company veteran.
3. Dollar General's (finally) addressing inventory challenges
As a refresher, the COVID-19 pandemic wrecked Dollar General's supply chain, leaving it without enough inventory once the post-pandemic rebound finally began taking shape in 2022. The company subsequently loaded up on a ton of inventory in 2022 and 2023, anticipating a spending boom soon thereafter.
But that boom never really happened. The discount retailer has been dealing with too much of the wrong mix of merchandise ever since. Without enough room or money to buy more marketable goods, it's now missing opportunities to make sales.
DG Operating Income (Quarterly) data by YCharts .
Largely lost in the noise, though, is the fact that the underlying issue is being addressed. During May's first-quarter earnings call, Vasos explained that the company will stop carrying around 1,000 SKUs this year while streamlining its store-replenishment logistics. That decision follows January's investment in ShelfEngine's artificial intelligence platform, allowing for smarter ordering of fresh produce for stores that offer it.
These aren't earth-shattering evolutions in and of themselves. They are representative, however, of the efforts the discounter is putting in to fix what's arguably one of its biggest problems right now.
4. Dollar General's rivals are on the ropes
Finally, Dollar General has a prime opportunity to not just win some new business but also perhaps establish a physical presence it wasn't planning to just a few months ago. Rival Dollar Tree (NASDAQ: DLTR) has "initiated a formal review of strategic alternatives" for its struggling Family Dollar chain of 7,761 stores, while Big Lots has filed for Chapter 11 bankruptcy protection. That's another 1,200 dollar stores similar to Dollar General.
This doesn't necessarily mean any of these competing stores are closing. Some might. Many might not.
It's likely at least some will shutter, though, if only to conserve value while these transitions are completed. Either way, both chains are clearly on the defensive. That's a prime opportunity for Dollar General to play a little offense and maybe even set up shop in vacated storefronts with established foot traffic.
Just be smart
It's not an ironclad guarantee, to be clear. Although Dollar General can be fixed, it's still a work in progress. It could take a while to see real evidence that real progress is being made. That evidence would be same-store sales growth driven by a rebound in spending among less-affluent consumers. However, if you're unable to handle this risk -- or the prospect of further losses before the stock finds its ultimate bottom -- shop around for something else.
There are several reasons a rebound may already be brewing, though, so if you've got the room and tolerance for above-average risk paired with above-average upside potential, this stock's recent pullback is arguably overdone.
The analyst community thinks so anyway. Even with their overwhelming number of lukewarm "hold" ratings, the consensus price target of $98.23 per share is nearly 20% above the stock's present price. That's certainly not a terrible way to start out a new trade.
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James Brumley has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy .
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