Best Stock to Buy Right Now: Dollar General vs. Five Below

Dollar General (NYSE: DG) and Five Below (NASDAQ: FIVE) both lost more than 40% of their value over the past 12 months. Both discount retailers struggled with rising costs, fears of higher tariffs, and tougher competition in the low-end market.

But could one of these discount retailers also be a discount stock for value investors? Let's compare their business models, growth rates, and valuations to decide.

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The differences between Dollar General and Five Below

Dollar General once sold all of its products for $1, while Five Below kept its prices under $5. But over the years, inflation and higher tariffs on overseas goods made it impossible to maintain those low prices for all of their products.

Dollar General now sells about 20% of its products for $1 and the rest at higher prices. Five Below still sells a lot of products under $5, but it started raising its prices to the "Five Beyond" ($5 to $10) range five years ago.

Dollar General mainly sells housewares, cleaning supplies, packaged food, health and beauty products, basic apparel, and other essential goods. It also opens more stores in underserved rural areas than its top competitor Dollar Tree.

Five Below sells a broader range of toys, fashion accessories, bath and body products, candy and beverages, room decor, smartphone accessories, stationery, novelty and gag items, and other less essential products geared toward younger shoppers. Its stores are spread out across urban, suburban, and semi-rural areas.

Which discount retailer is growing faster?

From fiscal 2018 to fiscal 2023 (which ended in February 2024), Dollar General's net sales grew at a compound annual growth rate (CAGR) of 9% as its year-end store count grew from 15,370 to 19,986 locations. It continued to expand even as the pandemic, inflation, and higher tariffs rattled the retail market. During those five years, its earnings per share (EPS) grew at a CAGR of 5% as it bought back 12% of its shares.

For fiscal 2024, Dollar General expects its same-store sales to grow 1.1% to 1.4% and its net sales to increase 4.8% to 5.1%. But it expects its EPS to decline 22% to 27% as it grapples with hurricane-related expenses in the second half of the year. Inflation and the threat of higher tariffs exacerbated that pressure.

Dollar General was also implicated in workplace safety violations which led to a $12 million settlement with OSHA and the dismissal of its CEO Jeff Owen in 2023. Todd Vasos, the company's former CEO, returned to replace Vasos after that debacle.

But despite those setbacks, it still expects to expand its footprint with 730 new store openings, 1,620 remodels, and 85 store relocations for the full year. It plans to keep opening new stores in 2025 as Dollar Tree struggles with store closures.

From fiscal 2018 to fiscal 2023 (which ended in February 2024), Five Below's net sales grew at a CAGR of 18% as it doubled its year-end store count from 750 to 1,544 locations. It grew its EPS at a CAGR of 15%, but it only reduced its share count by 1%.

But for fiscal 2024, Five Below expects its same-store sales to dip 3% as its net sales grow 8% to 9%. That split between its same-store and net sales is worrisome since it suggests it's relying too much on new store openings to drive its top-line growth. It plans to open 227 net new stores for the full year, but it's unclear if those locations can generate sustainable same-store sales growth as they mature.

On the bottom line, Five Below expects its EPS to drop 16% to 20% in fiscal 2024 as it deals with inflationary pressure on its product prices and wages. Like Dollar General, it could also face even more pressure if the U.S. hikes its tariffs on overseas goods. Five Below also just hired Forever 21's former CEO Winnie Park as its new CEO in early December, but it's unclear if this new leader can stabilize its business in this shaky market.

Dollar General and Five Below both face stiff competition from discount online retailers like PDD's Temu and Amazon's Haul. All of those macro and competitive headwinds crushed both stocks over the past year.

Which stock is a better value?

Dollar General trades at just 12 times forward earnings and pays an attractive forward dividend yield of 3%. That low valuation and high yield should limit its downside potential, but the bulls might shun its stock until it fully resolves its employee safety issues, laps its hurricane-driven expenses, and proves that it can keep growing its earnings even if the incoming Trump administration drastically raises tariffs.

Five Below looks pricier at 22 times forward earnings and doesn't pay a dividend, but it's growing faster and isn't bogged down in employee safety problems. It also faces tariff-related threats, but its focus on younger shoppers might help it grow faster than Dollar General and more diversified discount retailers. So for now, I think Five Below is a better buy than Dollar General -- but both stocks could stay in the penalty box until the market gains some more clarity regarding inflation and tariffs.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Leo Sun has positions in Amazon. The Motley Fool has positions in and recommends Amazon. The Motley Fool recommends Five Below. The Motley Fool has a disclosure policy.