Dollar General Earnings: Results Still Under Pressure, but Long-Term Targets Look Achievable

Key Morningstar Metrics for Dollar General

• Fair Value Estimate: $115.00
• Morningstar Rating: ★★★★★
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: Medium

What We Thought of Dollar General’s Earnings

We don’t plan to significantly alter our fair value estimate for Dollar General DG following the firm’s fiscal 2024 fourth-quarter earnings release. Results modestly outpaced our expectations, though management issued a tepid outlook for 2025, with EPS guidance of $5.10-$5.80 below our $6.24 estimates before the earnings call. We anticipate adjusting our near-term outlook to more closely align with management’s expectations as the retailer grapples with economic uncertainty and a tough competitive landscape, which should offset benefits from the time value of money. We still think shares are undervalued as we look favorably upon the firm’s rural distribution network and a potential profit recovery.

Same-store sales expanded 1.2% in the fourth quarter, slightly outpacing our 1% forecast. Unsurprisingly, the consumables category (80% of the firm’s sales) enjoyed a low-single-digit percentage lift in sales per store while discretionary categories exhibited declines. We surmise that cumulative inflationary effects over the last three years and an abatement of federal income security spending have prompted low-income consumers to prioritize spending on essential items. While we don’t foresee a prodigious rebound in consumer demand coming anytime soon, we continue to see Dollar General’s same-store sales gradually improving from 2023-24 figures as real wages from low-income earners inflect positively.

Adjusted operating margin of 5.1% declined 80 basis points from the prior year but exceeded our 4.7% estimate. The decline stemmed from several factors, including unfavorable mix, inventory damages, and elevated store investments. We think Dollar General can return to a 6.0%-6.5% operating margin in the longer term (but below its 9.0% historical average) as sales mix improves and the firm rectifies headwinds from inventory damages and shrinkage. Still, a profit recovery will take time, as margins are unlikely to approach 6% until the end of the decade.