3 Reasons Dollar General’s Rally Has Legs

Who would have thought it, but of all the stocks out there Dollar General (NYSE: DG) has been one of the most consistent performers of the past three years. Not only was it a winner before COVID, with shares rallying 75% in the two years before February 2020, but also during COVID, as they rallied 90% into last August. And now with shares up 30% since then and setting all time highs, Dollar General can claim to be a post-COVID winner too. 

But even after this multi-year rally, there are still plenty of reasons to think that they have further room to move. Let’s take a look at a few of them. 

Strong Numbers

For starters, the company’s internal revenue engine is ticking away nicely, as evidenced by its Q2 earnings report which was released yesterday. It topped analyst estimations and gave the bulls plenty to be happy about. Net sales for example increased 9% to $9.4 billion, same-store sales increased 4.6% and operating profit Increased 7.5% to $913 million. In addition, the board increased their share repurchase plan, which is one of the strongest buying signals management can give to investors as it tells them they think shares are still undervalued at present prices. 

What makes Dollar General’s results here all the more impressive is that they come at a time of soaring inflation and a worsening cost of living crisis. Todd Vasos, CEO, referred to this while striking a deservedly bullish tone with the release, saying “we are pleased with our second quarter results, and I want to thank our associates for delivering another quarter of strong performance during a period of inflation and economic uncertainty. The quarter was highlighted by same-store sales growth of 4.6%, a slight increase in customer traffic, accelerated growth in market share of highly consumable product sales, and double-digit growth in EPS.”

Strategic Management Decisions

The astute reader might argue that a cost of living crisis is actually a tailwind for discount retailers like Dollar General, but it’s not quite that simple. Shares of Ross Stores (NASDAQ: ROST), the well known discount department store, have been selling off since April. While they’ve managed to reverse some of the losses more recently, coming into July their shares were down almost 50% in just three months. Dollar General shares have for the most part avoided this kind of turbulence. 

It’s fair to say that much of this consistency is coming from the company’s management, who have made a point of being as prepared as possible for all economic eventualities. As Vasos told investors yesterday, “during the quarter, we also made significant progress advancing our operating priorities and strategic initiatives, further enhancing our unique value and convenience proposition. Looking ahead, we are confident that our strategic actions, which have transformed this company in recent years and solidified Dollar General as the clear leader in small-box discount retail, have positioned us well for continued success, while supporting long-term shareholder value creation.” One way this positioning is manifesting itself is through the company’s forward guidance. For the full year management is now expecting net sales growth of approximately 11% compared to its previous expectation of approximately 10.0% to 10.5%. 

Bullish Comments

In addition to solid numbers and steady hand of management, Dollar General also has some of Wall Street’s heavyweights in its corner. Earlier this month, the team over at Morgan Stanley reiterated their Buy rating on Dollar General stock, with analyst Simone Gutman noting that out of all the retailer stocks he covers “only the Dollar Stores and to a lesser extent Home Depot (NYSE:HD) appear relatively insulated in Q2. For the rest, there is potential for downward revisions, even from companies that have pre-announced.” 

These aren’t bad remarks to be having said about you, especially with shares trading within a few dollars of fresh all time highs. Dollar General has proved itself to be not only remarkably resilient in recent years, but also consistently strong, and the factors that have supported this to date show no sign of abating for now at least.