3 Reasons to Buy Dollar General Stock Like There's No Tomorrow

2024 was a rough year for Dollar General (NYSE: DG).

During a year when the S&P 500 jumped 23%, shares of the discount retailer fell 44%. Profits were down at Dollar General as it faced headwinds from weak consumer spending and inflation, competition from Walmart, and operational missteps.

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However, that sets up a buying opportunity for investors, as Dollar General has been a winner on the stock market throughout its history. The company has more stores than any other retail banner in the U.S. It has a turnaround plan to bounce back from last year's poor performance, and the stock is dirt cheap at the moment. Let's take a closer look at three reasons to buy Dollar General stock right now.

Image source: Getty Images.

1. The stock looks like a bargain

Dollar General is currently being priced as a no-growth company in secular decline.

The stock trades at a price-to-earnings ratio of 12. That's based on earnings that look temporarily suppressed over the last year, as profitability has fallen due to challenges that look surmountable and macroeconomic conditions that will change.

Dollar General's valuation compares to the S&P 500 at 28, and retailers like Walmart at 40 and Costco at 56.

Despite its recent weakness, Dollar General still has a number of competitive advantages, including having a store within five miles of 75% of the U.S. population. With more than 20,000 small-footprint locations, no other chain can match its convenience. Its economies of scale give it an advantage over independent chains and create barriers to entry against other discount chains.

Though its decline in profit is concerning, investors shouldn't lose sight of the fundamental strength of its business model and the historical competitive advantages it's given the company.

2. The turnaround plan is promising

To put the business back on track, the company announced its Back to Basics plan, focusing on a wide range of factors. They include better inventory management and improved in-stock levels. It's also prioritizing keeping the checkout area fully staffed and eliminating 1,000 stock-keeping units (SKUs) to cut down on labor and inventory.

To improve operating margins, it's closing down temporary storage facilities as well.

While profit margins continued to fall in its third quarter, it did return to same-sales growth at 1.3%, a sign that the changes are helping to improve results. The growth in same-stores also shows that underlying demand remains strong, despite its challenges on the cost side.

The company is also experimenting in other areas, including a same-day delivery pilot. It's testing home delivery through the DG app with a third-party provider at 75 stores. The company currently offers delivery through DoorDash from 16,000 stores and aims to match that with the DG app. It also continues to see a boost in business from stores it remodels.

Finally, inflation is cooling, and the macroeconomic headwinds that have saddled the retailer seem to be fading.

3. Growth potential

Dollar General stock also looks cheap because the company isn't done growing by any means. Unlike many retailers that have stopped opening stores, including Walmart, the company continues expanding rapidly, showing ample room in the discount-store market.

For fiscal 2024, the company is targeting 730 new stores, in addition to 1,620 remodels. It expects to increase the number of real estate projects in 2025, with about 575 new stores in the U.S., up to 15 new stores in Mexico, and remodeling around 4,250 stores.

That push should help boost revenue and grow profits as long as the company can keep its margins steady, which shouldn't be hard given that they've already fallen.

At this point, the bar is low enough on Dollar General stock that it shouldn't take much to drive a rebound. If it can return to profit growth, investor confidence will come back as well, and the stock would nearly double just by recouping last year's losses. The upside potential is a lot greater than the downside risk with this retail stock.

Should you invest $1,000 in Dollar General right now?

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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale, DoorDash, and Walmart. The Motley Fool has a disclosure policy.