Dollar General Surges on a Return to Profit Growth. Is This Recession-Proof Stock Still a Buy?

Dollar General (NYSE: DG) has a long history of outperforming in tough economic times. In 2008 and 2009, the discount retailer reported growth in same-store sales (comps) of about 9% each year, even while the rest of the retail sector and the broad economy was reeling from the financial crisis.

Heading into 2025, the stock was struggling after a multiyear period of market share losses to competitors like Walmart, as well as falling profits. However, the combination of its effective "Back to Basics" turnaround strategy and the economic turmoil from the trade war has helped Dollar General get back to top and bottom-line growth.

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The stock has surged 50% in just a few months, including a 16% one-day gain following its fiscal first-quarter earnings report in early June. Let's take a closer look.

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Dollar General's recovery continues

In its first quarter (ended May 2), the company reported 2.4% comps growth and overall revenue growth of 5.3% to $10.4 billion, above the $10.3 billion analyst consensus.

After several quarters of declining profits, the company's gross margin increased 78 basis points to 31.0% due to lower shrink and higher inventory markups. Selling, general, and administrative expenses rose 77 basis points to 25.4% due to higher labor costs, incentive compensation, and repairs and maintenance.

On the bottom line, earnings per share (EPS) increased 8% to $1.78, well above expectations of $1.49. The company also lowered its inventory by 7% at the end of the quarter to $6.6 billion, showing that it's doing a better job of managing that line item, which generally helps avoid markdowns.

While management said that uncertainty remains in the market due to the potential impact of tariffs on its business and on consumer behavior, it raised its full-year guidance based on its outperformance in the first quarter.

For the full fiscal year, the company expects comps growth of 1.5% to 2.5%, up from a previous forecast of 1.2% to 2.2%. It also raised its EPS forecast from a range of $5.10 to $5.80 to a range of $5.20 to $5.80.

In particular, management expressed optimism about initiatives it has taken to reduce shrink (primarily theft), due in part to lower employee turnover, which the company expects to be a tailwind over the remainder of the year.

Consumers are trading down

Dollar General tends to outperform in down or uncertain economies, not because its core low-income customers spend more but because higher-income consumers trade down and start shopping at its stores too.

The company saw just that in the first quarter. On the earnings call, management said that 25% of its core customers reported having less income than a year ago, but it has seen increased activity from higher-income customers, which it said was the highest in four years. Management is focused on retaining these shoppers as well.

Is Dollar General a buy?

Dollar General stock may not be as cheap as it was a few months ago, but the company is well-positioned to capitalize on continued economic volatility. And its Back to Basics strategy seems to be paying off as the growth in comps, gross margin, and operating profit show.

Over the long term, the company still looks poised for growth as it continues to open new stores and refreshes existing ones through Project Elevate and Renovate.

Management's formula of blanketing the country with convenient discount stores has historically been a winner, and the recent recovery bodes well. With the stock still down over 50% from its all-time high, Dollar General is a good bet over the coming years.

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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Walmart. The Motley Fool has a disclosure policy.