Dollar General Stock's Hot Start to 2025

Dollar General (NYSE: DG) stock is up 20% to start 2025. The sleepy discount retailer has missed most of the market volatility at the start of 2025 and may actually benefit from more restrictions on competition from ultra-discount online marketplaces from China such as Temu. Discount retailers like dollar stores do well in tough economic times.

But Dollar General stock is still off 65% from all-time highs as it deals with inflation and worsening profit margins at its dollar stores. Does its hot start to 2025 mean the stock is a buy for the rest of the year and beyond? The answer is complicated.

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Countercyclical in an economic downturn

Dollar General serves as the go-to shopping location for everyday needs for millions of Americans. Its low prices help lower-income shoppers afford a variety of foods and other necessities.

When times are good, Dollar General and its more than 20,000 stores actually face headwinds as people upgrade their shopping experiences. In 2022 and 2023, this was a double whammy, as the economy was doing well despite the heavy inflation on the company's input costs. Fewer customers were trading down to Dollar General while its costs were rising, which led to deteriorating profit margins. Operating income, which was $1.7 billion over the last 12 months, was over $3 billion in 2021.

In 2025, investors are betting that Dollar General stock will perform well if a recession is induced by the Trump administration's tariff policy.

Betting on a business turnaround

Another factor hurting Dollar General is the lack of improvements made to its stores during the COVID-19 pandemic. This allowed the company to earn a lot for a few years, but now it is facing the consequences with major remodels and capital expenditures coming in the next few years.

However, it seems the worst may be behind the company. Same-store sales growth was 1.4% in 2024, with guidance for a 2% to 3% growth starting in 2025 and 2026. By remodeling a ton of its stores, management believes it can return to an operating margin of 6% to 7% by 2028 compared to 4.2% in 2024. Add on some sales growth from new store openings and the next few years could see a massive turnaround in earnings growth.

DG Operating Margin (TTM) data by YCharts

Is Dollar General stock cheap?

After the stock's jump to start 2025, Dollar General trades at a market cap of $20 billion. It currently sports a dividend that yields 2.6%. Last fiscal year, it generated $40.6 billion in net sales. If this metric jumps 3.5%, in line with guidance for total sales growth from 2025 onward, that equates to $42 billion in annual revenue this fiscal year.

Applying a 6% operating margin -- using the 2028 guidance number -- brings operating income to $2.5 billion, which looks mighty cheap versus a market cap of $20 billion. These are theoretical numbers, and margins will likely be lower in 2025, but you can see the potential future earnings power at Dollar General.

But can the turnaround happen? I think it can. Dollar General has a long history of stable growth, should do well in an economic downturn, and has not set sky-high profit margin figures for the business. Plus, global trade rules are now helping it against international competitors for nonconsumable goods like Temu. Historically, its profit margins were actually higher than 6%. With expectations still low on the stock, today looks like a good time to add Dollar General to your portfolio.

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

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Brett Schafer 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.