Dollar General Just Raised a Huge Red Flag About the State of the Economy. What Does It Mean for Investors?

A good way to gauge the overall health of the economy, and consumers specifically, is to pay attention to what retailers are saying. One retailer that focuses on offering value to discount shoppers is Dollar General (NYSE: DG). It has more than 20,000 stores throughout the country and has been a growth beast over the years -- but it is seeing signs of trouble.

Last year, it said its core customer was struggling and feeling "financial constrained." But on its latest earnings call, it suggested that things may be much more dire than that.

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A red flag for the economy?

A struggling consumer is nothing new for Dollar General. And it's arguably not a new theme for the business, especially as it focuses on low-income shoppers who earn an average of less than $40,000 per year. These are going to be the consumers who are facing the greatest financial difficulty in the country, and inflation only exacerbates their challenges.

But on the company's latest earnings call, which took place a few weeks ago, management outlined just how bad the situation is. CEO Todd Vasos says that it's not just that consumers are cutting back on discretionary spending, but that they "only have enough money for basic essentials." Vasos was also not optimistic things would improve in the near future.

While this is a troubling situation and outlook for the economy, another concern is that while President Donald Trump has announced tariffs on multiple countries, including China, Mexico, and Canada, more tariffs could still be coming. That could put consumers in even worse shape as prices may not be coming down anytime soon.

Dollar General sees just minimal growth ahead

Dollar General's sales rose by 5% to $40.6 billion for its most recent fiscal year, which ended on Jan. 31. But in terms of same-store sales, for locations that were already open a year ago, the growth rate was much more modest at just 1.4%. Dollar General has benefited from aggressively opening up more locations to serve more customers, which bumps up its overall growth rate.

The company, however, is planning to close 96 Dollar General branded stores and 45 pOpshelf stores (which cater to a more affluent customer base) that have been underperforming. That, however, is just a modest blip when you consider that as of the end of the period, it had just under 20,600 locations in total. And while it is cutting back on some underperforming stores, it still remains committed to opening more locations in the U.S. and Mexico.

While it's encouraging to see Dollar General remove underperforming stores, the modest cutback isn't likely to have much of an impact on the bottom line. And the bigger problem may be its organic growth rate. For the new fiscal year, the company is projecting same-store growth in the range of 1.2% to 2.2%. The good news is that Dollar General believes that with respect to tariffs, it is "well positioned to mitigate the impact in 2025."

Is Dollar General stock worth taking a chance on?

Dollar General stock has been outperforming the market this year, rising by 10% while the S&P 500 has declined by 2%. But even with those gains, the stock is still down more than 60% over the past three years.

Currently, Dollar General stock is trading at 15 times next year's estimated earnings, based on analyst expectations. However, with some challenging economic conditions ahead and still many question marks surrounding tariffs, I wouldn't rush to buy the stock. It has looked cheap before, and buying on weakness hasn't proven to be a good strategy for investors in the past -- and I'm not optimistic it will be now. Dollar General faces some considerable challenges ahead, and without a stronger growth strategy, I would steer clear of the troubled retail stock.

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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.