Dollar General Stock Just Popped, but Is the Worst Really Behind It?

Dollar General (NYSE: DG) has struggled in recent years, as inflationary pressures hurt its lower-income consumer base. However, the stock staged a strong rally following its fiscal first-quarter earnings report. As of this writing, it is up 50% in 2025.

Let's take a closer look at its most recent earnings report and commentary to see whether this rally is sustainable or if the worst is not really behind it just yet.

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Is Dollar General turning the corner?

On the surface, tariffs would seem to be a big negative for a company like Dollar General. After all, the retailer's core customer base was already feeling pressure from higher prices due to inflation, and it looked like it was losing share to big-box price leader Walmart (NYSE: WMT). However, the company has begun to see more higher-income consumers frequent its stores in search of value.

The retailer said it plans to minimize the impact of tariffs on its gross margins as much as possible without raising prices, although it could increase prices as a last resort. It plans to do this by working with vendors to cut costs, moving some manufacturing to other countries, and tweaking its product lineup by making changes or swapping out certain items. It noted that a mid- to high-single-digit percentage of its overall purchases are directly imported from China, but about double that percentage comes indirectly from the country.

The inroads with higher-income consumers contributed to a 2.4% increase in same-store sales in the quarter. While traffic fell by 0.3%, its average checkout ticket rose by 2.7%. Growth came from gains in the food, seasonal, and home & apparel categories.

Same-store sales is a very important metric for Dollar General, as it has said in the past that it needs to grow its comparable-store sales by around 3% for it to leverage its expenses and grow its earnings. However, the composition matters, and growth from high-margin areas, such as seasonal items, helped power its earnings higher. This appears to be largely a reflection of higher-income consumers shopping at its locations, as well as its efforts to improve the customer experience and offer better merchandising in categories such as seasonal decor and home items.

Image source: Getty Images.

The company also said that its newer pOpshelf store concept -- which is meant to provide a fun and affordable shopping experience with a focus on home goods, seasonal decor, and party supplies -- performed well, exceeding expectations.

Overall, Dollar General's revenue rose 5% year over year to $10.4 billion, while its earnings per share (EPS) jumped 8% to $1.78. That was well ahead of the analyst consensus of $10.3 billion in revenue and adjusted EPS of $1.48.

Gross margin increased 78 basis points to 31%, helped by lower shrink and higher inventory markups. Shrink is the amount of merchandise that gets lost, damaged, spoiled, stolen, or just generally can't be sold, and the company has been working hard to improve this metric.

Looking ahead, Dollar General raised its full-year guidance. It now expects revenue to grow between 3.7% and 4.7%, with same-store sales increasing between 1.5% and 2.5%. That's up from a prior outlook of revenue growth of 3.4% to 4.4% on comparable-store growth of 1.2% to 2.2%. Meanwhile, it raised the low end of its full-year EPS guidance to a range of $5.20 to $5.80, up from a previous forecast of between $5.10 and $5.80. It said that the guidance assumes that current tariff rates remain in place.

Source: Dollar General.

The company is also looking to add 575 new store openings in the U.S. this year and up to 15 in Mexico.

Can Dollar General's momentum continue?

Dollar General appears to be benefiting from the trade-down effect this year. This is something Walmart has been experiencing for a while, but something dollar stores like Dollar General had previously been missing out on. It was only last year that these companies were talking about how the current environment was one of the most difficult periods in their histories. And for dollar stores' core customer bases, things may actually be worse now with tariffs than they were last year.

As such, whether Dollar General can continue to turn the corner likely depends largely on whether it can keep the higher-income customers that have begun to visit its stores and continue to attract new ones. Right now, the company is seeing these new customers visit more often and spend more money per visit. Its remodeling efforts, along with initiatives like its mobile app and own same-day delivery service and partnership with DoorDash, are also likely helping attract more affluent consumers.

From a valuation perspective, the retailer now trades at a forward price-to-earnings (P/E) ratio of 20 based on analyst estimates for fiscal year 2025 (ending January 2026). That valuation shows the stock is no longer in the bargain bin. While Dollar General has made a lot of progress -- with its core consumer still very stressed -- I don't want to chase this rally at its current valuation.

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