Why Dollar General Rallied 18.5% in March, Even As Markets Crashed

Shares of Dollar General (NYSE: DG) rallied 18.5% in March, according to data from S&P Global Market Intelligence.

The move for the beaten-down retailer was all the more surprising given that the overall S&P 500 Index was down 5.6% during the month.

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Dollar General benefited from a number of unique things during March. One, the stock was already significantly below its all-time high, having run into trouble over the past few years. So it was a very cheap name already, whereas the market had been hovering near all-time highs as of mid-February.

Second, the company also delivered better-than-feared results, which was enough to get the stock moving higher again.

Dollar General beats revenue expectations amid economic uncertainty

In its fiscal fourth quarter reported in the middle of the month, Dollar General grew revenue 4.5% to $10.3 billion, which was ahead of expectations. In addition, the all-important same-store-sales metric surprised to the upside, at 1.2%, above analysts' expectations of 0.93%.

While earnings per share plunged over 52.5%, that was mostly due to one-time charges to close underperforming stores. Without those charges, EPS still would have still been 9.2% lower on an adjusted basis. While still marking a decline, the adjusted profits were still in line with the margin compression Dollar General has seen over the course of the current year, and would have beaten analysts' estimates.

Guidance was a bit conservative, however, as management gave a full-year EPS outlook just below analysts' estimates, in a range of $5.10 to $5.80. Analysts were expecting $5.94.

So the earnings report was a bit mixed, and might not be the only reason for Dollar General's rise. More likely, investors may have poured into Dollar General because it's thought to be a recession-resistant stock, where low-income folks buy daily essentials. The theory behind low-cost retailers is that revenue isn't likely to be affected that much in case of a recession.

Given that the risk of recession certainly went up during the month, investors may have merely rotated into a stock like Dollar General. In addition, the fact that the stock was already about 70% below its all-time highs entering the month might have given investors a sense that Dollar General could outperform on a relative basis in a recession scenario, since the downside may be limited.

But Dollar General isn't an automatic buy, either

Just because Dollar General is thought of as recession-resistant doesn't mean it's a riskless buy today. After all, if Dollar General were truly that low-risk, the stock wouldn't be down 70% from its highs.

During the post-pandemic inflationary period, the company saw a costly combination of high inflation that hurt its low-income customers' purchasing power, and an increase in theft.

Thus, it's unclear if a tariff-driven stagflation scenario would be much better. As one can see with last quarter's earnings, DG's margins are still under pressure. Therefore, investors should regard the stock as an interesting turnaround story, rather than a sleep-at-night recession-proof holding.

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Billy Duberstein and/or his clients have 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.