Struggling Retail Giant Comparison: Target versus Dollar General

Struggling Retail Giant Comparison: Target versus Dollar General

Certain retail businesses have faced challenging situations lately. Although the economy is generally thriving and is near full employment, prolonged periods of above-average inflation and increased interest rates have caused financial strain on consumers.

Two retail companies that have suffered significant losses are Target (-0.01%) (TGT) and Dollar General (1.91%) (DG). Both have plunged below their record highs and are currently trading at attractive valuations. But which stock currently provides a better value for money?

Half-price sale

The chart below demonstrates how far each company has tumbled. Target's downfall began in the final months of 2021, as stocks related to home goods and physical items started to experience a post-pandemic hangover. Dollar General then plummeted in early 2022, with its stock price falling even further. While both stocks traded at mid-twenties price-to-earnings (P/E) ratios at certain points throughout the past few years, their valuations have also taken a hit, even as earnings have dwindled.

If economic circumstances improve, both companies could witness a significant comeback. However, they are grappling with comparable, yet not identical, issues. Can they overcome these challenges?

Money problems, money troubles

Despite having slightly distinct core customer segments, Target and Dollar General are experiencing reduced customer spending due to inflation, as expenses continue to escalate.

Dollar General CEO Todd Vasos highlighted in August that 60% of the company's sales come from households with an annual income of less than $35,000. Vasos revealed that Dollar General recorded its weakest sales during the latter weeks of each quarter, implying that customers faced financial difficulties as they approached the end of their financial month.

This financial strain may have played a role in the increased theft observed by management, which emerged as a 21-point factor affecting gross margins. Despite theft being an issue since the pandemic, Dollar General still witnessed higher instances of theft compared to the previous year.

Target's most recent challenging quarter echoed similar trends. CEO Brian Cornell confirmed that customers were adopting cautious spending habits, only indulging in promotions and cutting back on unnecessary expenses. Cornell also acknowledged that the company had to spend extra funds re-routing inventory to West Coast ports due to potential dockworker strikes, further impacting earnings.

In contrast, Target's shrink issue improved, unlike Dollar General's ongoing challenge with theft. However, Target's disappointing results might also imply enhanced competition, as customers may have opted for other retailers like Walmart (0.77%) (WMT) due to its more affordable pricing.

Which company is more likely to resolve its predicament?

Although Dollar General has experienced a more severe decline and trades at a slightly lower P/E ratio, Target appears to be the safer choice at the moment.

Dollar General, which was once regarded as resilient during economic downturns or recessions, appears to be struggling more with the high-inflation economy, which seems to be impacting its lower-income customer base in a widespread manner.

In comparison, Target's customers may be more financially resilient, less likely to resort to theft, and are better able to manage their budgets. The shrink issue continues to pose a challenge for Dollar General, while Target appears to be obtaining greater control over the situation.

Additionally, despite Target having a disappointing quarter, the company has also experienced positive quarters in the past year, with third quarter's port issues appearing to be a one-off event. This allows Target to pay down debt faster and reduce its debt-to-EBITDA ratio. In contrast, Dollar General's debt-to-EBITDA ratio continues to increase.

While a considerable improvement in economic conditions or Dollar General's execution could potentially result in stronger returns, Target seems to be the safer option at the moment. Its stock may be worth considering after its recent dip.

The current market conditions, with high inflation and increased interest rates, have led to financial strain for consumers, making it challenging for retail businesses to thrive. Investors looking to finance their investments in retail stocks might be interested in Target and Dollar General, both of which have faced challenges due to reduced customer spending and theft issues.

In the face of high-inflation economics, Dollar General's lower-income customer base seems to be particularly affected, leading to increased theft and financial difficulties for its customers. On the other hand, Target's customers appear to be more financially resilient, less likely to resort to theft, and have better budget management skills. This resilience, along with Target's control over its shrink issue, makes it a potentially safer investment choice compared to Dollar General.

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