1 Growth Stock Down 68% to Buy Right Now

There’s no denying that general dollar (DG 2.70%) shareholders got punched last week. In response to the discount retailer’s second-quarter earnings miss and lowered revenue guidance for the rest of the year, shares fell 32% on Aug. 29, the stock’s worst day ever.

Most investors are now more than a little suspicious of owning a stake in the discount chain. But if you think it’s darkest before the dawn, with the stock down 68% from its 2022 peak and trading at a seven-year low, this might actually be a great time to buy shares this well positioned company.

“Financially Lacking”

Dollar General delivered a major disappointment with its second-quarter numbers. Although total sales rose 4.2% year-over-year to $10.21 billion, same-store sales (comps) growth was 0.5%. Operating profits actually fell 20%, dragging earnings per share down from $2.13 a year earlier to $1.70 this time. Analysts were looking for earnings of $1.79 per share on a $10.37 billion top line.

Alleviating the bearish flames was cut sales guidance for the full year 2024. The retailer had modeled revenue growth of between 6% and 6.7%, fueled by more cost-conscious consumer spending. Now it’s only looking for revenue growth between 4.7% and 5.3%, with comps growth returning to an expected range of just 1% to 1.6%.

However, perhaps the severity of the post-earnings decline was driven by the fact that these numbers contrasted so sharply with peers. Walmart. It delivered top-line growth of 4.8%, fueled by same-store sales growth of 4.2% in the US. high its full-year revenue and earnings guidance.

What gives? The key is the difference between the typical customer of the two companies. As CEO Todd Vasos commented during the second quarter earnings conference call, “the lower-tier consumer continues to be very financially constrained, especially in terms of her ability to feed her families and to support their families”.

With Dollar General’s core customers unable to continue spending as they have in the past, the retailer is largely on the defensive until things improve. That could take some time, though, and things could remain miserable for the company in the meantime. With that in mind, it’s no wonder investors panicked.

Just remember one important idea about how the economy and the stock market work.

Dollar General’s worst-case scenario is the current reality

Dollar General isn’t up against bigger players like Walmart or Aim. If anything, mostly avoid competing directly with any chain. While Target and Walmart stores are typically located in highly populated areas, 80 percent of Dollar General stores are in small, often underserved cities with populations of less than 20,000.

It also caters to lower-income households, more likely to be seen in such locations, according to data from market researcher Numerator. Products with custom sizes allow for lower prices, for example. Much of its inventory is also private label, giving the retailer even more control over how it meets the needs of its most frequent shoppers.

And the strategy usually works great. The discount retailer saw incredible revenue and footprint growth between the end of the 2008 subprime mortgage crisis and the start of the pandemic.

However, the circumstances of 2021 were extraordinary. Namely, inflation was rampant. The U.S. Consumer Price Index is now 21% higher than it was four years ago, and that number likely understates the real cost-of-living increase. Revenue growth just hasn’t kept up. That’s why for most of the past three years, Walmart has said most of its market share gains have come from households making more than $100,000 a year — that crowd is also looking to stretch their dollars. McDonald’s recently reported disappointing quarterly results, in large part because, according to CEO Chris Kempczinski, customers “continue to feel the squeeze in the economy and a higher cost of living.” And that echoes the recent observations of executives with PepsiCo and other consumer-facing companies.

It’s a problematic dynamic for Dollar General simply because its core customers — lower-income rural households hit hardest by inflation — aren’t changing how they shop or what they buy. These consumers simply spend less. Underscoring this idea are similar results from the direct competitor The dollar tree. Its Dollar Tree brand saw a modest same-store sales increase of 1.3% last quarter, while its Family Dollar banner actually experienced a same-store sales decline of 0.1%.

With all of this in mind, it’s no surprise that investors are worried about the retailer’s foreseeable future. But there is something the market seems to be forgetting here.

The risk is worth the reward for strong investors

I mean, the economy is certainly cyclical, but ultimately it’s growing. The past two years have been the extreme exception to this norm, creating the affordability crisis that is constraining consumer spending now.

However, there was never any doubt about Dollar General’s business strategy. The economics that usually work in Dollar General’s favor will do so again sooner or later, and probably sooner than later.

And waiting for clear evidence of that rebound to dive into Dollar General stock could be a strategic mistake. Stocks have a funny way of trading predictively, reflecting likely outcomes anywhere from a few months to a few years into the future.

So while it’s struggling now, Dollar General is likely to do better soon. Its stock should start pricing in such a process even sooner. Indeed, now down 68% and trading at a seven-year low, the worst-case scenario could already be priced into the stock, and then some.

Taking a swing right now is not for the faint of heart. The likely volatility could prove unsettling even if its net effect is bullish. Keep it in perspective if you’re inclined to dive.

If your gut tells you to dive in, though, fear not. As Warren Buffett likes to say, be fearful when others are greedy and greedy when others are fearful. And the market is clearly pretty scared of Dollar General right now.