Shares of discount retail chain Dollar General(NYSE: DG) haven't been fun to hold in recent years. The stock plunged 45% in 2023 and followed that up with another 44% drop in 2024.
But things may finally be looking up for shareholders. As of this writing, Dollar General stock is up 31% year to date, placing it among the best performers of the S&P 500(SNPINDEX: ^GSPC) in 2025.
One chart tells Dollar General's story. The stock was a strong performer in past years, thanks to sales growth, which led to increased earnings per share (EPS) -- its profits. But its EPS have dropped in recent years.
The chart shows an undeniable correlation between Dollar General's EPS and its stock price.
Dollar General will report financial results for its fiscal first quarter of 2025 on June 3. But its fourth-quarter EPS were down a whopping 53% year over year, leading to a 32% decline on a full-year basis. In other words, the company's profits were still going in the wrong direction as of the most recent financial report, even though its stock price is already starting to bounce back. If the stock price is correlated with the EPS, this is alarming.
In other words, it's imperative that Dollar General's profits soon improve if the stock is going to sustain this rally. But first, investors should understand why profits slipped in the first place.
Image source: Dollar General.
Why did profits plunge?
Dollar General's bloated inventory was one of the biggest contributing reasons for its recent woes. In short, management simply stocked its stores with too much stuff. The chart shows a rapid inventory buildup in 2022, well exceeding revenue growth.
Having too much stuff hurt Dollar General's profits in multiple ways. First, theft was easier. Stores also didn't have enough space, which led to more merchandise getting damaged. And now, Dollar General has been forced to discount items to sell them quicker.
However, Dollar General has been getting this problem under control for over a year now. Theft (kindly referred to as "shrink" in the industry) is down, and management expects further improvements in 2025. And the chart shows that inventory levels are now approaching the expected trend line.
If the situation is truly getting under control, then why were Dollar General's Q4 profits down so sharply? It turns out that management closed underperforming Dollar General stores and stores for its small pOpshelf brand. This had some one-time associated expenses. And while these expenses are real, Dollar General's profits would have been relatively stable year over year without this issue.
In other words, it truly appears that the problem has stopped getting worse for Dollar General, putting it in a good position if it can build on its improvements.
Can profits come back up?
For its fiscal 2024, Dollar General had diluted EPS of $5.11 -- a sharp decline from diluted EPS of $10.68 in fiscal 2022. But for fiscal 2025, management expects the slide to stop.
Granted, there's uncertainty with the forecast. But it's guiding for full-year EPS of $5.10 to $5.80. That represents nearly 14% growth in a best-case scenario.
In fiscal 2026, Dollar General's management expects additional EPS growth of more than 10%.
One thing that could hold Dollar General's profits back for now is the economy, but not for the reason one might think. The company just experienced all-time high sales in the past year, showing consumers still shop there as much as ever. But they're buying more food products than usual, which have lower profit margins.
As long as the consumer is stretched thin and only buying essential food items, Dollar General's profit potential may be limited. But the forecast takes this into account.
In other words, Dollar General's profits should improve in coming years in spite of the economy, due to operational improvements. Once the economy improves as well, that would simply point to an incremental profit opportunity.
Earlier in 2025, Dollar General stock traded at its cheapest price-to-sales (P/S) valuation ever. And it still trades well below what's normal for this company.
Supposing it's on the right track and its profit margins are poised to rebound, Dollar General stock is still quite cheap right now compared to its profit potential. Those who invest today are assuming management has a hold on the issues that have plagued its business in recent years, and that these stores stay relevant.
Personally, I believe the worst is over, and it's back on a path for steady improvements, which is why I still believe that Dollar General stock is worth buying.
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