Dollar General Is Rallying, but Are Investors Overlooking This Vital Growth Story?

The S&P 500 (SNPINDEX: ^GSPC) has basically gone nowhere so far in 2025, but it has done it in an exciting way. The market's correction, however, didn't seem to have an impact on Dollar General (NYSE: DG) shares, which rose while the S&P 500 index was falling. At the time of this writing, Dollar General is up around 15% while the market is flat.

Before you rush out and buy outperforming Dollar General stock, you need to understand this one overlooked "growth" story.

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What does Dollar General do?

Dollar General is, from a big-picture perspective, a retailer. But it is focused on selling products at low price points. Further, it targets less affluent markets that are underserved by larger retailers, notably big-box stores like Walmart and Target. The goal is to provide a mix of convenience and low price points for consumers.

Image source: Getty Images.

That said, it is important for investors to understand that low price points don't necessarily mean low prices. For example, at Dollar General, a person can buy a roll of toilet paper for a low price point. But each roll of toilet paper in a mega-pack from a big-box store might actually end up being a cheaper alternative. Dollar General is basically targeting customers who either can't afford the mega-pack, don't want to travel the extra distance to a big-box store, or both.

Right now, Dollar General's business model is in favor on Wall Street. That's because its low price point model tends to do relatively well during periods of economic weakness. There have been concerns that the U.S. economy could fall into a recession in 2025 thanks to geopolitical and tariff issues.

SPY data by YCharts

How does Dollar General make the most money?

In many ways, it is understandable that investors would be interested in Dollar General right now. Its core lower-income customers will likely need to continue shopping at the store, while higher-income customers might trade down in the face of economic concerns. But there's an interesting story when you dig a bit deeper into Dollar General's business.

The core of what Dollar General sells are, effectively, consumer staples items -- things like personal hygiene products, paper products, and food. In 2024, this category accounted for 82.2% of sales. The rest of sales came from seasonal goods, home products, and clothing, which accounted for 10%, 5.1%, and 2.7% of sales, respectively. This trio of categories is vitally important to Dollar General's bottom line because they have higher margins than the consumer staples products it sells.

DG data by YCharts

This is where the "growth" problem comes in. Consumer staples as a percentage of sales has increased from 79.7% in 2022 to the current level of 82.2%. The other three higher-margin categories have all fallen steadily over that time.

This may seem like a small change, but retailers often live on very tight margins. And that's particularly true for a retailer selling to lower-income customers with a low-price point model. Dollar General's consumer staples sales have been growing, but because of this, its profit margins have been falling. The stock has followed along for the ride, as the chart highlights.

Dollar General is working on a turnaround

Investors have turned to Dollar General as a safe-haven investment in a time of economic uncertainty, which makes sense. However, there are deeper issues here, as the company looks to turn its business around. It is cutting costs, focusing on adjusting its product mix, and upgrading its stores, all in an effort to improve performance.

This is a long-term investment opportunity for the right kind of investor. But if you only own Dollar General because you think it will perform well in a recession, you might be missing the underlying "growth" story (increasing sales of lower-margin products) that is actually acting as a business headwind.

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

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Target and Walmart. The Motley Fool has a disclosure policy.