Is Dollar General or Ollie’s the Better Buy After Earnings?

Both Dollar General (NYSE:DG) and Ollie’s Bargain Outlet Holdings (NASDAQ:OLLI) are trading significantly lower in the last month. And with neither stock getting a bump from earnings, it might be fair for you to wonder if the answer to the question in my headline is "are those my only choices?" However, both stocks have been winners during the pandemic. And so it’s a reasonable question to wonder which of the stocks represents a better value in a post-pandemic world.

First the Good News

In what has become a broken record, both Dollar General and Ollie’s posted strong fourth-quarter and full-year 2020 earnings. During the pandemic, consumers have turned to discount stores in an attempt to stretch their dollars further.

The companies benefited further from two rounds of stimulus checks that were delivered. With most of the country still under some degree of mitigation efforts due to the novel coronavirus, consumers focused on keeping their homes well stocked with the essentials.

But the stock prices of both companies are falling. And the reason for that is guidance.

Facing an Unclear Future

The two companies took different paths on forecasting 2021 earnings and revenue. In the case of Dollar General, the company prepared investors for results that were worse than what analysts were already expecting.

Specifically, Dollar General said it projects full-year same-store sales to fall 4% to 6%. That’s much larger than the estimate of a 1.2% decline forecast by Refinitiv. The discount retailer is also forecasting net sales to be flat to 2% lower. Estimates were for a 1.4%.

On the bottom line, Dollar General gave guidance for an EPS of $8.80 to $9.50. Estimates were for an EPS of $10.08.

However, Ollie’s declined to issue future guidance citing “continued uncertainties regarding the pace of economic recovery and consumer demand amidst the ongoing pandemic.”

That was similar to the remarks made by Dollar General’s John Garratt who said that this round of stimulus brings more uncertainty. Said Garratt, “We are competing with other segments of the economy outside of retail for that share of wallet, so how much we get is uncertain.”

I expect that as investors take the time to digest the two earnings reports in the coming days, Dollar General will be rewarded for providing a “worst case scenario.” Simply put in most cases, the known is better than the unknown.

Plus, there may still be a range of outcomes regarding the economy. As the weekly unemployment numbers continue to show, there are a lot of people out of work which should continue to make the value of dollar stores top-of-mind for consumers.

The Stocks Are Not Closely Correlated

Investors might expect DG and OLLI stocks to have a high correlation. In other words, they move up or down at roughly the same pace. But that has not been the case historically. In fact, an analysis from MacroAxis shows that OLLI stock is about 2 times riskier than Dollar General.

And looking at the stock charts of the two companies, you can see that DG stock has recently had the bearish death cross. On the other hand, OLLI stock looks on the cusp of a potentially bullish crossover of its 50-day moving average above the 200-day moving average.

However, OLLI stock is up 125% in the last 12 months compared to a gain of just 25% for DG stock. This could be due, in part, to capital expenditures. Dollar General has continued to aggressively grow its footprint during the pandemic and plans to continue doing so in 2021.

And the Winner is ….

I go with Dollar General for a couple of reasons. First, for investors that put stock in valuation, DG is trading at a P/E of around 17 which is around the sector average. OLLI stock has a P/E ratio above 24 as of this writing, which implies it may be overvalued. This was a point that Thomas Hughes made in a recent article for MarketBeat.

Furthermore, I like Dollar General’s expansion plans, particularly as it tries to incrementally go after a higher-income consumer with its Popshelf brand.