Moods can switch quickly on mercurial Wall Street. For example, Dollar General(NYSE: DG) has rallied strongly in 2025 even as the S&P 500 index was falling into correction territory and the Nasdaq Composite into a bear market. Dollar General's retail business model might have something to do with that, but there's more to the story here, and it is important to understand investor expectations around this low-price retailer before you buy it.
What does Dollar General do?
Roughly 80% of Dollar General's top line is from the category it calls consumables. This group includes consumer staples like cleaning supplies, food, and personal hygiene items. These are necessities that are purchased regularly regardless of the economy. This is important to keep in mind as you consider the company's situation today.
Image source: Getty Images.
The next big piece of the puzzle here is that Dollar General is a low-price retailer, so it sells mostly consumer staples, mostly at low prices. Only there's a caveat here.
Sometimes the low price is possible because the package size is small. A multipack of toilet paper bought from a big box retailer like Walmart might actually be more attractively priced on a per-roll basis than a single roll at Dollar General. But the single roll is still notably less expensive than the multipack.
And the final part of the story is that Dollar General's stores are generally small and located close to the populations it is meant to serve. A consumer could go to a Walmart store, but it might be a 30-minute drive. A Dollar General store just a couple minutes away will be far easier to get to and will require much less time to get the shopping done. That's particularly true if the customer just needs a few items.
So, all in, Dollar General is largely selling necessities at low prices in conveniently located stores. This is a compelling proposition for lower-income consumers and even for more-affluent buyers during economic uncertainty.
That background helps explain why the stock has rallied in 2025 even as the S&P 500 and the Nasdaq Composite have struggled. Market uncertainty has been driven by geopolitical concerns, tariffs changes, and a general fear that a recession could be on the way. Essentially, investors are looking for a safe haven.
What's interesting about the stock's rally, however, is that Dollar General is still down by around 65% from its 2022 highs even after the strong 2025 performance. So there's another layer to consider when it comes to the rally, and that is investor expectations.
Simply put, investors aren't expecting much from Dollar General right now. So even modest improvements in its financial results are likely to be well received. Notice that the stock-price decline here was accompanied by an earnings decline even though revenue has remained fairly resilient. The company's margins are the issue, not its core model.
Fixing profit margins can take a little while, since it usually requires a mixture of cutting costs and raising prices. For a low-price retailer, this can be a nuanced effort.
In 2025, a key goal is to close underperforming stores (including a new store concept that didn't work out as well as hoped), updating existing stores, and opening new ones. Management is currently projecting earnings to fall between $5.10 and $5.80 per share. It earned $5.11 in 2024, so this range suggests the company has hit bottom, and the next move is for earnings to rise.
If earnings do start to head higher, investors will probably continue to reward Dollar General with a higher valuation.
Is there more room to run for Dollar General?
The simple answer is yes, given the still huge price decline from 2022 levels. The strong early-year showing in 2025 is more a function of market dynamics than anything Dollar General has actually achieved.
If it starts to show that its business has turned for the better, the still-negative mood among investors will probably keep changing for the better, too.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Walmart. The Motley Fool has a disclosure policy.
