Dollar General’s (DG) fourth-quarter earnings today offered a mix bag. Revenue beat expectations, but earnings tanked and DG stock rose 5% heading into midday trading.
The deep discount retailer looks like it could be a sleeper hit for investors eyeing a recession. With a fortress-like cash position, a discount model built for tough times, and a leaner operation, Dollar General might be the stock to buy before an economic storm hits.
Fourth-quarter revenue of $10.3 billion narrowly beat Wall Street’s $10.26 billion estimates, with net sales up 4.5% as same-store sales climbed 1.2%. Yet earnings of $0.87 per share badly missed the $1.50 per share forecast, dragged down by a $232 million, or $0.81 per share, charge from closing 96 DG stores and 45 Popshelf locations.
Operating profits were also cut in half to $294 million, and net income fell to $191 million from $402 million a year ago. DG stock is also down 53% over the past year amid inflation and consumer pullbacks, but dig deeper and this dip could be a setup for a rebound.
Dollar General’s cash flow is solid. The quarter saw operating cash flow soar 25% to $3 billion, with inventories trimmed 4% to $6.7 billion, making the retailer a bit leaner ahead of lean times. With $2.3 billion in cash and investments at the end of the year and no debt, DG has the liquidity to weather a downturn.
Compare that to peers like Walmart (WMT) ($8.8 billion in cash and $47 billion debt) or Target (TGT) ($3.8 billion cash, $16 billion debt), and DG’s balance sheet looks like a fortress. Recessions tend to crush discretionary spending, but DG’s focus on low-income shoppers thrives when budgets tighten. With 70% of its customers earning under $35,000, Dollar General could be the ultimate recession play.
DG’s model is simple: small, rural stores peddling cheap essentials. It is one that shines in recessions. Notably, it saw a 2.3% rise in average transaction size during the fourth quarter, a signal that customers are trading down and is a trend that accelerates when wallets shrink. Consumables, which are the deep discounter’s bread and butter, grew while seasonal and apparel lagged.
With 20,345 stores across the U.S. and Mexico, DG’s footprint dwarfs rival Dollar Tree’s (DLTR) 16,000, and the 575 new stores planned for 2025 (down from 800 last year) shows it is taking a more measured approach to growth.
DG stock trades at just 12.4 times trailing earnings and for a fraction of sales. At just 10x free cash flow, Dollar General is a bargain-basement stock.
Now, DG isn’t flawless. The store closures indicate it overshot its abilities and full-year earnings guidance of $5.48 per share at the midpoint trails the $5.85 consensus. Rising global trade tensions, competition from the likes of Walmart, and inflation’s bite on low-income consumers’ pockets lingers. But CEO Todd Vasos touts progress on its “Back to Basics” strategy, with higher customer satisfaction and market share gains. A recession could amplify this edge.
At around $75 per share, DG stock is a steal if recession fears spike. Its cash, discount DNA, and operational reset shouts recessionary resilience. While near-term hiccups hurt, the retailer’s history and fundamentals suggest DG thrives when others falter. Buy now, and you might ride out the downturn with a winner.
