Dollar General (DG) is undergoing a significant transformation that will shape its investment potential in the next five years. Unlike many companies that remain relatively unchanged over time, Dollar General’s expansion plans are altering its investment thesis.
Expanding Store Count and Revenues
With over 19,000 small discount general merchandise stores spread across the United States, Dollar General caters to communities, particularly those with populations under 20,000. This niche positioning allows the company to fill a void in these areas, providing essential consumer staples to its customers.
Over the past five years, Dollar General has experienced substantial growth, expanding its store count by approximately 30% and increasing annual revenues from $23 billion to $38 billion. The company’s expansion strategy includes opening over 1,000 new stores annually, potentially operating more than 22,000 stores by 2028.
Challenges and Investments
However, despite its growth, Dollar General stock has faced staffing issues, inventory challenges, and regulatory fines. These problems have drawn attention to the need for the company to invest in existing stores, including increased staffing and repairs.
Addressing these issues will take time and effort, potentially up to five years. As Dollar General focuses on improving its operations, the stock may face headwinds in the short term. Nevertheless, if the company successfully resolves these challenges, it could see its operating profit and net income rise significantly by 2028.
Running into Systemic Obstacles
Looking ahead, Dollar General may encounter a systemic obstacle as it exhausts suitable locations for new stores in rural and non-urban areas. Most small towns already have Dollar General stores, and expanding further in these regions could dilute the revenues of existing stores. Additionally, its top-shelf chain, designed for more urban markets, will face tough competition from established retailers like Target and Walmart.
Transition to a Cash Cow
Despite these challenges, Dollar General has the potential to transition from a growth-oriented company to a cash cow. Operating in markets with minimal competition positions it well for consistent cash flow. Consequently, the stock’s value may be influenced by its reliable dividend rather than aggressive growth.
Evaluating the Investment
Considering the current stock price, down 35% from its previous high, and forward earnings multiple of less than 16, there is potential for upside over the next five years. However, it is crucial to reassess the investment thesis after this period, as Dollar General’s growth prospects may diminish.
In conclusion, Dollar General’s stock is undergoing a transformative journey. While challenges persist in the short term, the company’s expansion and investment plans could shape its future as a reliable cash cow. Investors should consider the risk-adjusted upside in the next five years and reevaluate their position.