Despite a 71% decline, this S&P 500 dividend-paying stock might experience significant growth by 2025.
Retail giants have faced a barrage of challenges recently. The pandemic, surging inflation, and transforming consumer habits have squeezed the performance of numerous retail companies. The SPDR S&P Retail ETF has witnessed a decline of 9.6% over the past three years, significantly underperforming the S&P 500's impressive 26% return. However, as an industry endures such underperformance, an appealing opportunity for better returns often arises due to lower valuations.
One glaring example of this trend is Dollar General's stock, which has seen a staggering 71% decrease since its 2022 peak. Despite concerns surrounding near-term consumer spending trends and fierce competition, this behemoth continues to release positive same-store sales. The company's "Back to Basics" strategy could inspire better earnings growth in the coming years.
Wall Street analysts express unease regarding consumer spending trends and rivalry from big-box retailers. However, Dollar General has not succumbed to these concerns altogether, with continuous growth in same-store sales and promising strategies to bolster its position.
The stock currently trades at an accessible price-to-earnings multiple of 12.5, due to the company's moderate same-store sales growth of 1.3% in Q3 compared to the previous year. Despite Walmart reporting stronger same-store sales, Dollar General's smaller and more easily accessible stores offer it a unique advantage, maintaining its competitive edge in discount retail.
So, where does Dollar General go from here? Is this the company's peak performance, or does it harbor untapped potential to further strengthen earnings and sales growth?
Unbeknownst to Wall Street, several factors contribute to Dollar General's ongoing growth. The company has calculated strategies to fortify its standing, not only facing its current challenges but also dominating the retail landscape.
Dollar General's Back to Basics plan includes ambitious initiatives, such as incorporating automation in fulfillment centers and enhancing supply chain management. These efforts aim to save costs, improve profitability, and ultimately, bolster earnings.
Recall that Dollar General's CEO, Todd Vasos, reported progress in the company's Q3 earnings call. Customer satisfaction levels have surged by over 900 basis points since Q1, with store cleanliness and improved supply chain performance highly praised by store visitors.
Additionally, the company has opened two new distribution centers in Colorado and Arkansas. These facilities have the potential to lower costs in the supply chain, with the cut in delivery miles offering a 4% reduction, if not more.
Analysts anticipate a 2% expansion in Dollar General's adjusted earnings in 2025, suggesting enough financial support to sustain the dividend of $0.59 quarterly, or $2.36 annually. This low reliance on earnings to maintain the dividend indicates ample room to endure challenging environments.
Through these strategic initiatives, Dollar General can transform its fortunes, aggressively addressing challenges, and fortifying its standing in the retail sector. Thanks to the company's rich history of sustainable growth and the "Back to Basics" plan, the stock appears to be undervalued.
While the stock might dip further before seeing a substantial uptick, investors can anticipate wonderful returns over the next few years, depending on when consumer spending resumes and how effectively Dollar General executes its expansion plans.
- To boost returns, investors might consider investing in undervalued stocks, such as Dollar General, given its current performance in the retail sector.
- Despite facing challenges, Dollar General has implemented measures to improve its supply chain management and lower costs, like adding new distribution centers and incorporating automation in fulfillment centers.
- With a lower price-to-earnings multiple and promising growth strategies, Dollar General's stock could provide higher yields compared to many other retail stocks in 2022.
- Wall Street analysts may underestimate Dollar General's potential for growth, considering its 2% expected expansion in adjusted earnings in 2025 and its ability to maintain dividends despite challenging environments.
